Perella Weinberg Partners

Good morning and welcome to the Perella Weinberg Second Quarter 2024 Earnings Conference Call. During today's discussion, all callers will be placed in 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 Perrella Weinberg's 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 guarantees of future events or performance. Please refer to Perrella Weinberg'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 a discussion of some metrics, which are non-GAAP financial measures, which management believes are relevant in assessing the financial performance of the business. Corella Weinberg has reconciled these items to the most comparable GAAP measures in the press release files of 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.

Andrew Bednar Okay. Thank you, Taylor, and good morning. Today, we reported second quarter revenues of $272 million, a record for our firm, up 64% year over year and more than doubling quarter over quarter. And our first half revenues of $374 million were up 26% versus a year ago. In the quarter, we experienced a material increase in large transaction closings with relatively larger associated fees compared to the first quarter. Included in the quarter was more than $40 million in revenue related to closings that occurred within the first few days of the third quarter and which, in accordance with relevant accounting principles, we were required to record in the second quarter. We are very pleased with our results, but one quarter doesn't define our business. We are still very hard at work building a world-class franchise. We recognize that both the timing of certain transaction closings and the favorable positioning of our platform were factors in our outperformance this quarter. And our forward progress continues now with a distinct market tailwind that we have not enjoyed in over two years. Contribution and collaboration across our business drove our results, with revenue from M&A as well as restructuring and liability management up significantly year over year. The momentum we are seeing across our business is in part a reflection of putting the right partners in the right place over the past few years, both from a strategic and a geographic perspective. These teams continue to deliver for our clients, both for new clients and more and more for repeat clients who view us not just as a fee-for-service provider, but as a key partner as they tackle strategic and financial challenges. The game has changed in high-stakes complex transactions. In that market today, The boutique firm is a go-to advisor, not simply a second opinion provider. To be the go-to advisor, you need the talent. And year to date, we have added three advisory partners and have another two slated to join the firm later this year. We are confident that they will increase our client touchpoints and add revenue, both by introducing new clients to our firm, as well as servicing our current client relationships with expanded expertise. As we look ahead, we see signs of better conditions on the ground. Inflation receding, large pools of undeployed capital, and benchmark rates now declining in anticipation of the next Fed move. Though risks remain, especially around elections, global conflicts, and other geopolitical uncertainty, our clients are navigating through the fog, taking advantage of the conditions as they are, and leaning in rather than shying away. especially in the larger deal market. We see these dynamics reflected in our announcement pending backlog, which alongside a record revenue quarter continues to build. The M&A rebound we are experiencing has been led more by corporates than funds, but we did see an increase in sponsor activity this quarter, representing a potential source of revenue growth long-term. The return to a more normal level of sponsor activity is a matter of when, not if. Across our financing and capital solutions business, we continue to see elevated activity and strong engagement with clients. While we don't see a watershed event in bankruptcies on the horizon, more and more we see opportunities to assist clients with complex and stressed financing situations, as well as with more proactive maturity management. And we are extremely proud of our restructuring team for their recent awards and distinctions highlighted in publication reorg. Congratulations, RX team. Before I turn the call over to Alex, let me reflect for a moment. We recently marked three years since our public listing, and while this represents only a portion of the firm's rich history, we have accomplished quite a lot in that time. To date, our shares have risen over 80 percent. We have returned more than $400 million to equity holders, and we have managed our share count down while simultaneously increasing our publicly traded float. allowing new long-term investors to enter our shareholder roster. We have invested in growth by expanding our partnership, increased the visibility, recognition, and reputation of our brand, and diversified our advisory offering to support our clients whenever and wherever they need us. Most importantly, we continue to add new clients. These are world-class companies and investors who we are proud and honored to work with through thick and thin. We remain always on for our clients and for our teammates here at Perola Weinberg as we continue on our mission to scale our business. Thank you to all our loyal clients, and thank you to all our teammates for an excellent quarter, and importantly, for your exceptional business building that positions our firm to deliver for our clients and our shareholders. Alex, I'll now turn the call over to you to review our financial results and capital management in more detail.

Thank you, Andrew. Our adjusted compensation ratio for the first half of the year was 68% and represents our current estimate for our full year accrual. Our adjusted non-compensation expense was $41 million for the second quarter and $78 million for the first half. Adjusted non-compensation grew 10% in the first half compared to the same period last year. We will continue to aggressively manage our expenses consistent with prudently operating our business. Our adjusted tax rate for the second quarter was 32% and was 26% for the first half. We anticipate that our tax rate for the full year will be approximately 30%. At the end of the second quarter, we had 52.5 million shares of Class A common stock and 33.3 million partnership units outstanding. This includes the impact of a 5.75 million share offering in March, the proceeds from which were used with cash on hand to retire 7.5 million units in May. we remain committed to actively managing our share count. Not only have we fully offset dilution from RSU vesting, but as Andrew just mentioned, our share count is lower than when we first listed. Additionally, we have increased our publicly traded float by more than 20%. We ended the quarter with $185 million in cash and no debt. In the first six months of this year, we returned $162 million to equity holders while still investing for future growth. This morning, we declared a quarterly dividend of $0.07 per share. With that, operator, please open the line for questions.

Thank you. And at this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star and 2. And we will pause for a moment to allow questions to queue. And our first question comes from Devon Ryan with Citizens J&P.

Hey, good morning, Andrew. Good morning, Alex. How are you? Good morning, Devin. Good morning. Just want to start on the backlog. So obviously record quarter, I believe I heard the announced impending backlog is still at a record in building. So just two-part question on that. I'd love to just get a little bit of color around where you feel like you're gaining market share in the backdrop, because clearly we're not in a record M&A market. We're far from that. So to the extent you're driving these types of results, where the market share is coming from. And then as you look at the backlog, it also appears the speed to move deals through process is accelerating. So I just want to get some color on what's driving that as well. Thank you.

Yeah, sure, Devin. Look, I don't want to get too excited about the period over period changes. There's a lot of nuance and idiosyncratic issues that come about in these transactions as to exactly when they close. So we were fortunate in the current period that we had some very large fee closings, and that's great. I think what we're seeing, as I said on the last call, is that we're very focused on our corporate clients. sponsor and fund clients. They're both important clients to us, but we're just a bit more indexed on the corporate side. And I think everyone's been reporting, and we've said the same, that corporates are really leading us out of the trough in M&A and recovering quite nicely out of that trough. I do think we'll see sponsor activity coming back. As I said in my opening remarks, it's just a matter of when, not if. We are a beneficiary of the weighting toward corporate activity, number one. In terms of transactions and generally the timeline from engagement to announcement and then announcement to closing, we're not really seeing a material difference to what we've reported in the last few quarters. It's still taking more time to get engagement. and taking more time to announce and taking more time to close. And there are many factors that drive that, some of which is related to the regulatory regimes, both here in the United States, as well as in Europe and around the world, for that matter, that is just taking longer and is putting some time constraints on these transactions between sign and close, but also the period from engagement to signing. I think people are just more careful and taking their time, there's less sense of urgency. But I actually think that's quite healthy and I think leads to a bit less remorse as people sometimes rush to transactions and have second thoughts. So I think actually the engagement to announcement timelines, even though they're elongated, I think it leads to healthier transactions.

That's great, Keller Andrew. Thank you. And then a follow-up probably for Alex just on the comp ratio. So 68% for the first half is still above the normal target in the mid-60s. So just trying to think through kind of how to read that for what that implies for the rest of the year. How much is conservatism versus getting where the backlogs are? Is there anything else that's keeping you elevated? And then just within that kind of what you're targeting for new hires in the back half of the year, that would be helpful. Thank you.

Yeah, Devin, so as you know, that's a bit of a multivariable equation for all of us because we're thinking about not only what we need to compensate our teams so that they're firmly in their seat and are being fairly and properly rewarded for their efforts, number one. Number two, we do have investment that we continue to be very deliberate and steady about. We will continue to grow our firm with the addition of talent. So we have to factor that in. And lastly, we have to look at where the competitive set is and what's happening in the marketplace. So those three variables will come together as we head toward third and fourth quarter. We'll make adjustments as we see as needed. Right now, what we've accrued for the first half is our best estimate. And that's what we put out as our comp margin today, but that is subject to some change. We do like to stay within our target range. We indicated in our public listing, which was mid-60s, we've been at the outer bounds of that. More recently, I think for good reason. As you know, I've said this many times, a lot of our comp is in effect CapEx, and I lose the battle with account and false time on that. But we have to look at some of that comp ratio as really investing for the future and driving revenue going forward.

That's great. And then I guess just the other part of that is, is there any flavor you can give around what that CapEx in terms of just bringing in folks who's commander of the year, like how the recruiting pipeline works? Because I would assume that's one of the variables that you just suggested, Andrew.

Yeah, we're seeing good opportunities in the pipeline. I would say that much like the transaction timelines, the recruiting timelines are a bit more elongated. I think that's a function of people being busy a little bit now, time of year. But generally, we have still more people interested in our firm than we will probably admit to our firm, which is a good dynamic. And I also think, much like I said earlier about transactions, I think the more deliberative people are, the more thoughtful before they rush into a job change, the better off both parties are. So again, I think that's a pretty healthy dynamic. We're still on track with what We said on average we'd probably add five or six partners a year, and we'd probably have one or two retirements every year or two. I don't see much aberration from that this year, so we're still on that pace. And every once in a while we may have a one-off opportunity where we have a little bit more investing, but I think generally we're still on pace with what we've indicated early on in our public listing that we'll grow the partnership

know five or six people and then probably have one or two retirements uh between uh year over year periods okay that's great color thanks andrew i'll leave it there thanks thank you and we will take our next question from brendan o'brien with wolf research

Good morning, and thank you for taking my questions. I guess to start, I just wanted to touch on Europe and just want to get a sense as to how you would compare activity in Europe relative to the U.S. We've heard some of your peers indicate that trends there have lagged. And specifically with sponsors, I wanted to see if you've seen any pickup in activity following the recent moves by the ECB.

Yeah, I think Europe is lagging on announcements. You don't need me to tell you that. You can see that from the publicly available data. You know, our mix shifted a little bit down between Europe and the U.S., the U.S. leading more in terms of our announced revenue today. I think in terms of the other metrics we look at in our dashboard, you would think that they are much more aligned in terms of activity. So when we look at things like new business reviews, engagement letters, generally, you know, our activities with clients, both sides of the Atlantic are quite robust. And I think for different reasons, I think there are different pressure points in Europe, different areas of growth opportunity and different desires, for example, for a lot of European companies to rethink their global footprint and particularly their exposure to the U.S., which many, many European companies are looking to increase their exposure to the United States, which I think does play well into where we have boots on the ground. You know, we are largely a U.S. and European business in terms of the M&A markets. It's 75 percent of announced activity, probably a greater percentage of the fee pool. So, we feel very well positioned for that type of activity. But there are different drivers of transactions, and I think you're seeing that play out in the types of transactions that you see from Europe versus the United States. I think in terms of – so I think the revenue over time does start to catch up. Usually you have that lag effect that you're referencing, which I think you're absolutely right about. But with activity where it is, I do expect that European revenue for our business as well as the sector will likely improve as we head over into the back half of 24 and into 25. I think in terms of sponsor activity, not a material change because of ECB moves, and I don't expect a material change because of a likely Fed move now in September. I think generally we see a very significant backlog of of assets that sponsors will need to monetize in some way either through continuation vehicles or through sales or through ipos and you know that supply chain in the sponsor community just needs to get flowing a little bit more and that will naturally lead to more deployment of capital but we're in the early days here i think of a sponsor recovery i think they're abnormally low as proportion of overall activity and Again, I'll say it three times now. I do think it's a matter of when, not if, sponsors come back. And there are very sophisticated pools of capital there, very sophisticated investors. I've mentioned $3 or $4 trillion worth of dry powder between private equity, credit, and if you add in infrastructure, it's even more than that. And so I do see a lot of activity coming from that community over time.

That's great, Collier. And I guess my follow-up, kind of touching on a few of the themes there, just on the election, you know, on the one hand, and specifically the puts and takes of a potential change in regime in the U.S., on the one hand, you might have a more accommodative FTC, which should be somewhat of a benefit, but on the other hand, you know, potentially higher tariffs, maybe and headwind or tailwind activity. I would just like to get a sense of how you see the potential puts and takes of, well, I guess not the FTC, but I guess on the tariff side and the potential tailwind from a more accommodative FTC.

Yeah, I'll just start with a public service announcement that I am not a politician and I'm not a macroeconomist. I'm just a banker. So I'll give you my view for what it's worth. You know, I've now in my career have witnessed seven elections in my 30-year career. I, like many people, have probably really over-thought what the implications of elections will mean for markets and other parts of our lives. I think they're really important and they do have consequences. I think that probably the effects have been overstated, at least in my lifetime. And I think that for M&A specifically, it seems now given the commentary that both party leaders are interested in having some change to antitrust review and antitrust regulation. So on balance, I think that'll be a positive. I think that you have a Fed in motion now to begin at least looking at lowering rates. I think that is an important pivot and signal, and I do think that helps markets broadly. But we also have two candidates that seem to be less focused and have less of a priority on our national debt and probably place a high emphasis on spending. So I do think we'll probably be in a higher rate than we've normally had over long-term periods. I don't see rates going down to zero the way they did during COVID or the financial crisis. So I think we're going to live with just higher rates for a really long time, but not painfully high, but just above the crisis levels that you probably wouldn't want to be in anyway because it signals a troubled economy. So we're not hearing from any clients that they're stopping processes because of the election. We're not hearing from clients that they're accelerating anything because of the election. But I do think once that is settled, it does remove an uncertainty out of people's thinking and their models. And generally, post-election periods are a good time for then planning out your next horizon and taking appropriate action, so that's generally a good time for people in our business.

Great. Thank you for taking my questions.

Thank you. And we will take our next question from James Yarrow with Goldman Sachs.

Good morning, and thanks for taking my questions. Now that we're more than halfway into the year and results came in so much stronger this quarter, how are you thinking about the go forward for revenue here? just trying to anchor between the goalposts over the past two quarters. Is it conceivable for revenue to continue to rise off this level in the back half? Or should we expect revenue to be likely more between the average or between 1Q and 2Q? And then relatedly, how should we think about the impacts of the typical summer slowdown we sometimes see for dealmaking? And that will just, I'll stop there.

Yeah. Hi, James. Good morning. Thanks for the question. We don't give any kind of revenue guidance, as you know, so I'll just really stay far away from that. I think that, you know, what we reported here in the first two quarters, you know, we weren't overly excited on the downside in the first quarter, and we're not getting overly excited about the upside in the second quarter. There's, you know, given our scale, there's going to be a bit more volatility and some mean reversion, so we'd have to expect that. What I look at more is not trying to predict what's you know, what revenue is going to be quarter of a quarter. It's just an impossible task. But just looking at all those important indicia of a really successful and strong franchise, you know, how many clients are calling us, how many clients are engaging us, the fact that we're not seeing a lot of fee pressure, for example, in particularly larger complex transactions that we see people paying for the value we bring. And I think that's a sign of a really healthy market and a a healthy franchise um so we're it'll be unsatisfying answer to you and your job james but we're just not in the business of trying to think quarter to quarter um we're just trying to build this world-class franchise and we've grown a great trajectory to do that but we will have volatility um and i think most people don't simply take a quarter and you know multiply it by four just trying to understand that that because that's super clear um maybe just on the non-comp

I think they did rise a little bit more than the full year, 7% year-on-year growth number that you'd previously given. Maybe you could just help us think about the non-comp trajectory as we look ahead, and I think especially in light of the inflationary pressures that have been cited by many of your peers.

Sure. Alex, do you want to take that one?

Yeah, sure. Thanks, James. Look, our non-comp for the first half does reflect What I would characterize as irregular items and a bit episodic to this year. In particular, we had a very unfortunate bad debt item and also have ongoing litigation costs, which are substantially higher relative to the prior period. I do think that those results are generally in line with what we expect to see for the year, but I wouldn't think of those on a long-term basis. We're doing very well with our controllable costs, and over time with scale, we should see more leverage and improvement on that margin.

So just to be clear, you're talking about the dollars of non-comp or the comp ratio in terms of the near-term results?

the dollars of non-comp in terms of the near term.

Yep. Okay, great. Thank you. This last one, you know, I think the share count was notably higher, which I think that was reflective of a difference in how you calculated this versus historically. I guess, is this the right way to think about the share count going forward? And then any update on any near-term potential share unlock, excuse me, unlocks and triggers we need to be thinking about over the next few quarters?

Yep. Alex, why don't you take us through the current share count, but then I'll forecast a little bit of what we're expecting. Thanks.

Yep, sure. So look, I think the number to focus on is the outstanding count as of June 30th, which is just under $86 million. Obviously, that $100 million that you're seeing is really a function of the timing of when we affected the offering in Q1 relative to our very aggressive buybacks in Q2. So from a forward-looking perspective, you know, obviously we do issue share-based comp. All of that's reflected, you know, in our public filings. And for this year, we're anticipating an additional 2 million shares. That's on a net settled basis, you know, consistent with our past practice. We intend to net settle those shares that would enter our account, you know, by the end of the year. And again, this is before any retirement of units or open market repurchases if we choose to do that over the course of Q3 and Q4.

Okay. That's very helpful. Thank you. Sure.

Thank you. And our next question comes from Aiden Hall with KBW.

Great. Thanks for taking my question. Good morning, everyone. M&A has historically been a part of PWP's growth acquisition of TPH, although it's really foregoing public three years ago. So, Andrew, I'd be curious to get your thoughts on kind of inorganic growth opportunities and if there's any complementary businesses, whether it's primary fundraising, secondary advisory, or any other strategies where you think it would make more sense to buy versus build for PWP.

Yeah, good question. Look, we're in the M&A business, so we constantly think about ways to materially change the nature of our business rather than doing the job brick by brick, which is what we've been doing, other than TPH, as you correctly point out. We haven't found something that would be strategically and financially and culturally compelling. We've looked at some things over time. There are some adjacencies that are interesting. We have been a core M&A and restructuring and liability franchise. We've added now a terrific shareholder advisory and activist team. We've added a terrific debt advisory team. We have not had to go to the acquisition market for that. We've acquired talent, but not companies. That's always a little more challenging on full-on company deals or large team deals. We're open-minded to that. We just haven't seen anything that makes sense for us. um and so we will continue to build uh you know by uh by brick as i as i mentioned which um you know has worked very well for us and i think on extending our excuse me product line we're not going to stray off course from being an advisory only firm and that's not something that that we're actively looking at but there are some additional capabilities you know outside of the core that are lucrative and attractive adjacencies and we just you know, have to, you know, keep looking for the right people and capabilities. And that is something that we have a team that actively reviews that.

Got it. It's very helpful. Appreciate the call. Thank you. Thank you.

Thank you. And it appears that we have no further questions at this time. I will now turn the program back to our presenters for any additional or closing remarks.

Okay, thank you, Madison, and thank you, everyone, for joining the call today. I really hope you have a relaxing and a reflective end of summer. We really appreciate your continued support, especially those of you who have believed in our firm since day one and who continue to believe, as we all do inside the firm, in the unique potential of the Perrella Weinberg franchise. So thank you again for joining, and have a nice summer. Bye-bye.

Thank you. This does conclude today's Perella Weinberg second quarter 2024 earnings conference call. Thank you for your participation. You may disconnect at any time.