Perella Weinberg Partners

Good morning and welcome to the Pirella Weinberg Full Year and Fourth Quarter 2023 earnings conference call. During today's discussion, all callers will be placed in a listen-only mode and following management's prepared remarks, the conference call will be open for questions from the research community. This conference call is being recorded. At this time, I'd like to turn the conference over to Taylor Reinhart, Head of Communications and Marketing. Please go ahead.

Thank you, Operator, and welcome all. Joining me today are Andrew Bednar, Chief Executive Officer, and Alex Gottschalk, Chief Financial Officer. Before we begin, I'd like to note that this call may contain forward-looking statements, including PWPs' expectations of future financial and business performance and conditions and industry outlook. 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 guaranteed to feature events or performance. Please refer to PWPs' 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 a discussion of some metrics which are non-GAP financial measures which management believes are relevant in addressing the financial performance of the business. PWP has reconciled these items to the most comparable GAP measures in the press release files with today's Form 8K, which can be found on the company's website. I will now turn the call over to Andrew Bednar to discuss our results.

Thank you, Taylor, and good morning. Today, we reported 2023 full-year revenues of $649 million, up 3 percent from the year ago, with fourth quarter revenues of $213 million, up 16 percent from the year ago, and a large contributor to our strong full-year performance. We're pleased with how we navigated 2023's challenging market environment, growing our revenue while the M&A market globally saw closing down 30 percent. Three factors drove our outperformance compared to the broader market. Our relative scale, our weighting towards corporate clients, and our broader service offering. Our business model demonstrated not only resilience, but an ability to outperform as clients continue to seek and value our advice through cycles. Our financial performance was supported across our industries with nearly all of our sectors experiencing growth year over year and by a number of large deals with higher fees, especially within our M&A business. Early signs of improvement in market conditions and sentiment, which we saw begin in the second quarter of 2023, have given way to a broader market inflection, which has driven activity and dialogue levels, and today our announced and pending backlog stands at a record high. We expect the speed at which we recognize this backlog into revenue, especially for some of the larger deals, to still be slower than our historical norms. Nevertheless, a capital solutions business, which includes restructuring, made terrific progress during 2023 and client activity remains at elevated levels. The need for restructuring and liability management advice is high and growing. They respond in part to the higher interest rate environment and increasing complexity in financing markets and also a result of structural challenges in certain industries, such as in telecom and technology. In addition to several large mandates, including our lead role in the largest crypto exchange bankruptcy, there has been a considerable uptick in recent activity, which is fueling our 2024 pipeline. Our integrated and collaborative model has proven valuable, with many recent restructuring mandates requiring deep industry subject matter expertise, generating better client outcomes, and often leading to future M&A activity. In our capital markets business, the level of dialogue around financing and private credit in particular has increased substantially as our financing and debt advisory team has now integrated fully and seamlessly into our platform. Talent development and acquisition remain essential ingredients to our success and growth. We are adding industry subject matter services and capabilities that matter to our clients. In 2023, we added seven new advisory partners and seven new managing directors, increasing our industry knowledge and coverage in technology, business services, and in shareholder analytics and activism. In 2024, we intend to remain active in recruiting senior bankers in strategically attractive segments while remaining disciplined in our admissions criteria. Already in 2024, we have welcomed the managing director to our team in Europe and have a U.S.-based partner expected to join the firm during the second quarter. Our journey to a billion in revenue and achieving scale continues, with our progress measured by top-line results and much more. Our current team is stronger and more diversified than a year ago, with the in-place capacity to increase the firm's revenue and per-partner productivity. Our client relationships have deepened and expanded, as evidenced by recent high-profile transactions in which we were the first to introduce an exclusive or lead advisor, including in two of the five largest announced transactions in January, one in financials and one in industrials. These factors, combined with the inflection in the market, are beginning to create a tailwind for our business in 2024. Alex, I'll now turn the call over to you to review our expenses and capital management.

Thank you, Andrew. Our adjusted compensation expense represented 70 percent of revenues in 2023, exactly as we indicated in December, approximately 3 percent above 2022, and we believe appropriate given the industry response to market conditions and our continued targeted investment and talent through cycles. Our adjusted non-compensation expense was $144 million for the full year 2023, up 17 percent from a year ago, and within the expected range we provided at the start of 2023. For 2024, we expect the percentage increase in non-comp spend to abate and be in the single-digit range, with the increase driven by elevated depreciation expense and some investment spend related to T&E and IT. We continue to carefully manage our expenses, and as we scale up revenue, our operating leverage will be evident, as we expect non-comp, as a percentage of revenue, to fall in time as revenue grows. We maintain a strong capital position with $338 million in cash and short-term investments and no debt. We are committed to returning excess capital to shareholders and managing our share count to mitigate dilution from stock-based compensation. In 2023, we returned a total of $65 million to investors through repurchases, net settlement, and lieu of share issuances, dividends, and distributions. Additionally, this morning we declared a quarterly dividend of $0.07 per share. With that, operator, please open the line for questions.

At this time, if you'd like to ask a question, please press the star and one on your telephone keypad. Keep in mind, you may remove yourself from the question queue at any time by pressing star and two. Again, if you would like to ask a question today, please press the star and one keys now. We'll take our first question from Devin Rine with JMP Securities. Please go ahead. Your line is open.

Great. Thanks so much. Good morning, Andrew and Alex. Good morning. How are you? Doing great. I just want to start with a big picture question, Andrew. You've spoken about scale of the firm and being kind of less tethered to the overall M&A market. Obviously, I think we saw that in 2023 when you grew revenues when most were down pretty meaningfully. You mentioned the backlogs at a record as well. As we look out over the next couple of years, how would you contextualize Pearl Weinberg's ability to kind of grow faster than the broader M&A market? I'm just trying to think about whether it's kind of thinking about the growth of the senior banker footprint plus the growth of the broader industry or other network effects because of all the white space. Just want to get some of your thoughts on that algorithm of growth from here.

Yeah, thanks, Devin. We do think that the growth algorithm for the firm is quite different than some of the peers who have larger scale. As I mentioned in the opening remarks, part of the reason for our outperformance is our scale, but also the way that we're structured around our client-centric model and a more diversified service offering. Those three factors, I think, continue to drive our outperformance relative to the broader market. It's still the case that we are not as tethered to the overall announced and closing market when you look at global M&A. I think that will be the case for some time. It's also the case that when we are adding partners, we haven't reached a point of conflict or saturation with other parts of the business. We look for nonlinear growth when we hire partners so that they don't simply come in and add to our mix simply the revenue and clients they bring, but rather enhance the whole of the firm where they can leverage our restructuring, liability management, share all their activism and analytics, our financing advisory, the debt advisory practice, as well as our M&A business. We're just not at a point where we're adding partners and you potentially get some dis-energy from that as you get much larger. We're sort of nowhere near that in our planning horizon as we look forward with respect to our growth algorithm.

Okay, terrific. Thanks, Andrew. Just a follow-up on compensation. Obviously, the adjusted comp ratio of 70% in 2023 was a bit higher than kind of the targeted mid-60s for the firm. So just let me get some updated thoughts on how you're thinking about the level of revenues with the environment that you need to be in to get back there. I'm also appreciating them. There's some nuance as well. Thank you.

Look, comp is something we look at very, very carefully and we have to get that right because it's a multivariable equation where not only are our teams affected but also our shareholders. As you know, we as partners and employees own about 50% of the firm. So we're very incentivized and aligned with our shareholders in making sure that we get the comp ratio just right. We thought this year, given our investing and given just state of the market and what some of the competitive responses were in the marketplace regarding compensation, that it was proven to take up the margin a bit, 300 basis points, exactly what we signaled we would do back in November so that we took out a surprise from our announcement today. But we thought that was a proven sharing of some of the investments that we've made and some of the other inflationary pressures that we do see when we go down our comp stack. And again, I've said in the past that some of comp is really cap X when you think about it. I know I say it every time. I'll never win the game. I'm not arguing it with the accounting community, but these are our assets, these are our productive capabilities at the firm and you have to invest in those capabilities so that you're not then out trying to buy spot market resources as markets were down. So we think we've made proven investments in new people, proven investments in helping our future productive talent ramp up in our companies, helping our customers, helping our customers to make them as well as pay those who've had highly productive years and again sharing that burden a bit with our shareholders, but recognizing we too are shareholders.

Yeah, absolutely. Okay, great. I'll leave it there, but thanks so much.

Thanks, Adam. We'll take our next question from Stephen Chubeck with Wolf Research. Please go ahead. Your line is open.

Good morning. This is Brennan O'Brien filling in for Stephen. I guess to start, your comments on the backlog being at records levels is encouraging, but you seem to imply that restructuring and liability management comprise a greater percentage of that backlog than usual. So I just want to get a sense as to what that backlog looks like today relative to what you would typically see and maybe how that mix has evolved over the last year.

Yeah, thanks for the question. No, that's not the case actually. Our M&A backlog has announced impending closing transactions. That specific backlog is up much more in M&A than it is in restructuring. The two pipelines are up from where we stood last quarter and where we stood last year. So I'm glad you asked the question. I'm glad I had the opportunity to clarify that, that the announced impending backlog is largely driven by an increase in M&A.

That's helpful, Coller. I guess turning to advisory specifically, I just want to touch on Europe a bit. From what we can see in the public data, European activity was quite strong in the back half of last year. And one of your peers also called out strengthening the performance of the region as well. So I just wanted to get a sense as to whether this is consistent with what you're seeing in the business and whether there's any difference in the tone of discussions or pace and activity between the U.S. and Europe.

I think we see the tone and pace of activity to be consistent with what our peer group is reporting. And I think the -the-ground conditions there are pretty ripe for activity, both in traditional M&A as well as in restructuring liability management. I think we've had a bit of a lag on some of our larger transactions in bringing them to market and to announcement. And so we probably had less recognition into revenue in 2020-23 from our European business than would otherwise be suggested by the level of activity. But we're quite encouraged by the increase in engagements as well as in overall dialogue in Europe.

Great. Thank you for taking my questions.

Thank you. We'll take our next question from James Yarrow with Goldman Sachs. Please go ahead. Your line is open.

Good morning and thank you for taking my questions. I just wanted to start with thinking about some of the productivity numbers for you. I think we do lack some of the historical data that we have with your peers that have been public for longer. And also I think the business has changed quite dramatically over the past five or six years. So I just wanted to ask how you think about normalized productivity for your partner base. Is it more in mid-teens millions level like we saw in 2018 and 2021 or closer to 10 million like we saw in 2017, 1922 and this year?

Yeah, hi James. Thanks for the question. So we are definitely moving up and seeking to move up in our overall productivity per partner. This year we came in around 10 million. Last year was similar. As you mentioned, 21 and 18 million or more like 15 million. We certainly aspire to be in the 15 million dollar category. It is a function of course of overall revenue and market conditions but also how much you invest in new talent because new talent does require some time to ramp up and usually it's not a vertical takeoff. It's much more of a gradual takeoff when you hire individuals or teams to the platform. So we will look at our in-place partners and their productivity, those who are here at least three years and make sure that we're making the right investment decisions. But then also you have to account in the overall productivity of those partners who are recently joining the firm or have been recently promoted where again the potential for growth is also the built in organic opportunity to grow revenue over time.

Okay, that makes sense. And maybe just a related one on the investment. A quick one which is just maybe could you give us the partner account at the end of the year just for our models? And then when you look ahead, how are you seeing the competition for talent today? I think some of your peers have talked about potentially slowing hiring into 2024. So I guess just hiring is one of the main expectations for next year in 25.

Yep, so the partner account is at 64 and we expected the active in recruiting in 24 as we have been in 23 and before that. We haven't participated in the rapid rise of recruiting that we see in some other firms. We have continued to be very disciplined in how we grow. We want to make sure that we're hiring senior bankers who are strategically and financially as well as culturally an excellent fit for our firm. We have been seeing more and more candidates and that gives us a greater pool to select from. But the increase in candidates and applications if you will has not led to a change in our admission criteria. So we're still really strict on how we think about areas where we can grow. And as I said earlier, we really look for nonlinear growth, not just adding the revenue a partner would bring to the firm, but really thinking about a multiplier on that when partners come into our ecosystem and help to grow and drive our business. So we'll continue to be active. We have a lot of work to do to make sure that our firm is a prudent and a proper way to grow our firm.

That makes sense. Thanks a lot.

Thank you. And there are no further questions on the line at this time. I'll now turn the call back to Andrew Beckner for closing remarks.

Great. Thank you, operator. I'll close the call by saying first thank you to our team for their hard work and dedication and many contributions to our firm. And thank you to our clients for the trust and support. And thank you to our analysts and investors for your interest in Pirell and Weinberg and for joining today's call. And we'll speak again in May. Thank you.

This does conclude today's program. Thank you for your participation.