Earnings Call Transcript - PIPR Q3 2020

Operator, Operator

Good morning, and welcome to the Piper Sandler Companies Conference Call to discuss the financial results for the third quarter of 2020. The company has asked that I remind you that statements on this call are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements that involve inherent risks and uncertainties. Factors that could cause actual results to differ materially from those anticipated are identified in the company's earnings release and reports on file with the SEC, which are available on the company's website. This call will also include statements regarding certain non-GAAP financial measures. The non-GAAP measures should be considered in addition to, and not a substitute for, measures of financial performance prepared in accordance with GAAP. Please refer to the company's earnings release issued today for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure. The earnings release is available on the Investor Relations page of the company's website or at the SEC website. As a reminder, this call is being recorded. And now I'd like to turn the call over to Mr. Chad Abraham. Mr. Abraham, you may begin your call.

Chad Abraham, CEO

Good morning, everyone. Thank you for joining our third quarter 2020 call. I hope you and your families continue to be in good health during this difficult period. Deb Schoneman, our President; Tim Carter, our CFO; and I will go through our prepared remarks and then open up the call for questions. Let me start by providing some overall comments on our financial results before turning to our corporate investment banking businesses. The scale and diversity of our business model, resiliency of our employees and deep client relationships have generated strong and consistent results this quarter and throughout a turbulent 2020. Adjusted net revenues for the third quarter of 2020 were $298 million, up on a sequential basis and year-over-year. Our record revenues during the quarter were led by exceptional capital raising. We generated a pretax margin of 20.4% and adjusted earnings of $2.38 per share. Year-to-date, we have achieved impressive results with revenues of $835 million and EPS of $5.73, both representing high watermarks for the firm for the first 9 months of the year. Our operating margin was also strong at 17% for the year-to-date period. While many of the challenges presented by the global pandemic persist, corporations and public entities continue to adapt, and our clients are consistently turning to us for advice. We are raising capital for clients as they consider current financial conditions, we are helping clients reposition balance sheets and portfolios and we are advising clients on how to best achieve their strategic goals in the current market environment. We are delivering on the investments we have made in the business and benefiting from current market trends, which is driving strong growth for our shareholders. Looking forward, we expect to finish the year strong as advisory revenues start to rebound and our other businesses continue to generate strong results. Turning now to our corporate investment banking results. We generated total corporate investment banking revenues, including advisory services and corporate financing of $177 million in the third quarter of 2020, up 5% sequentially. Revenues of $482 million for the first 9 months of 2020 were up 34% year-over-year. The range of our product expertise and the multiple ways we can assist clients is demonstrated in our year-to-date revenues, with M&A activity generating 44% of revenues, equity financings contributing 38% and debt and capital advisory engagements producing 18% of total corporate investment banking revenues. Specific to corporate financing, we generated $100 million of revenues in the third quarter of 2020 and $208 million during the first 9 months of the year. Both are all-time records for our firm. Capital markets remained very active during the third quarter as strong investor demand, rising valuations, and stable markets fueled near-record new issuance volumes. Activity for us during the third quarter was principally in the health care sector, with contributions from financial services and technology. Our health care team completed 26 transactions during the quarter and served as a book runner on all 26, which reflects the strength of our franchise and the trust clients place in our expertise and execution capabilities. Within health care, capital raises were concentrated in biopharma, one of our areas of strength. For sub $5 billion market cap companies in biopharma, we book ran 20 equity deals during the quarter, ranking in the top 3. And during the first 9 months of 2020, we book ran 43 deals and maintained our top 5 ranking. In financial services, activity was focused on debt financings as banks raised capital at historically low interest rates and positioned balance sheets for future uncertainty. We offer a comprehensive, differentiated value proposition for our banking clients, where we maintain nearly 60% market share in debt issuance for community and regional banks. Technology issuance volumes remained strong in the market, and we participated in 13 offerings during the quarter. On a year-to-date basis, we participated in 19 offerings, up 138% over the prior year. We have 8 publishing research analysts covering over 120 technology stocks, a 50% increase in coverage since the beginning of last year, driven by a significant expansion of our software footprint. The technology sector is a large fee pool where we are underpenetrated, representing a growth opportunity for us. Supported by our recent activity in October, we believe that our corporate financing results will remain relatively strong in the fourth quarter. Turning to advisory. Our advisory practice slowed in the early months of the pandemic as many engagements were put on hold until business conditions became more clear. That said, we maintained our market position, and we believe Q3 will mark the trough in the cycle. We're seeing a nice increase in the number of new M&A assignments, and older assignments that were paused have been restarted. Further, active discussions with clients remain very encouraging, increasing our confidence as our M&A pipeline builds. Valuations remain strong, financing markets are open with historically low interest rates for debt capital, and CEO confidence is building. We generated $77 million of revenues for the third quarter of 2020, down 10% sequentially. We completed a total of 66 transactions during the quarter, consisting of 31 M&A deals spread across our industry verticals, and 35 capital advisory transactions, which were concentrated in financial services as the team continues to advise on a high volume of debt transactions. Revenues for the first 9 months of the year were $274 million, down 8% compared to an M&A market that was down approximately 30%. We believe that this demonstrates the quality of our team as well as the breadth and scale of our advisory business. A key component of our strategy is to drive overall market share gains through accretive combinations and selective hiring, and our strong relative performance on a year-to-date basis illustrates successful execution of this strategy. As an example, we've retained our leading position in bank M&A this year, having worked on 7 of the 10 largest bank mergers by deal value in the U.S. and every bank merger in the U.S. with an announced deal value greater than $1 billion. Secular drivers of M&A, like innovation, a changing market landscape, and low organic growth, are driving client activity. Also pointing to an improved outlook, M&A deal announcements market-wide increased during the third quarter. And more recently, we've seen several announcements of large-cap transactions. We have also seen an increase in new M&A deal announcements in our areas of strength, specifically health care, financial services, consumer, and energy. As I noted earlier, our M&A pipeline continues to build, and we expect to see advisory revenues grow in the fourth quarter and continue into 2021. Before turning the call over to Deb, I want to reiterate the importance of investing in and growing our corporate investment banking platform. Our investment banking Managing Director headcount of 137 is up 7% from the beginning of the year and represents one of the deepest and broadest platforms amongst our peers. Just as our strong relative performance, market leadership and broad product capabilities are helping us to build client relationships, they are also making our platform a destination of choice for talent looking to best serve their clients. Our pipeline of hires is robust, with several bankers looking to partner with us to help grow our product, sector, and geographic capabilities.

Debbra Schoneman, President

Thanks, Chad. Let me begin with an update on our equity brokerage business. We generated revenues of $33 million for the third quarter of 2020, down 18% on a sequential basis. As expected, equity market volumes declined in the third quarter as the market took a breather from the tumultuous first half of the year. Early August marked the 1-year anniversary of our combination with Weeden, and we couldn't be more pleased with the success of integrating the team onto our platform. With Weeden's trading expertise and our research capabilities, we are a premier destination for clients. Our institutional vote ranks continue to improve with clients of all sizes, and we are capturing mind and market share. On a year-to-date basis, we recorded $122 million of revenues, up 120% from the prior year. The quality of our research and specialized equity sales distribution are key differentiators for us in supporting our record equity financing activity. We continue to build out our research platform, and based on the number of stocks under coverage, we are ranked #1 in small cap and #3 in smid cap. And based on the Greenwich survey of smid cap portfolio managers, our sales force is ranked #1 in the health care, financials, and consumer sectors. We expect our equity brokerage revenues to increase in the fourth quarter as market volumes pick up and there is potential for increased volatility stemming from the upcoming U.S. elections. Next, let me turn to fixed income services. The Federal Reserve continues to inject liquidity into the market and has signaled low interest rates will extend into 2023. We generated fixed income revenues of $53 million in the third quarter of 2020, up 10% sequentially. And on a year-to-date basis, revenues totaled $143 million, up 145% over the prior year. We continue to benefit from the synergies of our combination with Sandler by capitalizing on our expanded client base and successfully cross-selling the unique product and strategic capabilities of both of our firms. All of our client verticals were active in the quarter. Clients have continued to reposition their balance sheets and portfolios as they adjust their strategies to accommodate the prolonged low-rate environment by putting more cash to work and seeking any available yield curve or spread opportunities. In addition, our market leadership in both public finance and community bank debt underwriting continues to provide proprietary deal flow that differentiates us with clients and drives incremental secondary sales and trading activity. We expect our fixed income revenues to remain strong as clients continue to strategically reposition in a changing market, barring a potential pause in activity related to the upcoming U.S. elections. Turning to our public finance business. For the third quarter of 2020, we generated $26 million of municipal financing revenues, down 14% sequentially and up 21% year-over-year. Our public finance business is benefiting from a stable market, low yields, strong investor demand, and market share gains. We completed 200 negotiated transactions, the #2 issuer nationally, raising $4.5 billion for clients during the quarter. We saw strong governmental issuance, especially for school districts, where we have market leadership in multiple states. For the first 9 months of 2020, we generated revenues of $80 million, an increase of 53% over the prior year. Through negotiated and private placement transactions, we raised an aggregate par value of $14.1 billion for clients, up 83% year-over-year relative to the market that was up 36%, demonstrating significant market share gains. We expect Q4 revenues to remain strong as market conditions are conducive to new issuance and refinancing.

Timothy Carter, CFO

Thanks, Deb. As a reminder, my comments will be focused on our adjusted non-GAAP financial results. We generated revenues of $298 million for the third quarter of 2020, up 2% sequentially and 47% year-over-year. Corporate financing revenues, which hit a record high for our company, and strong fixed income brokerage activity drove the sequential improvement. While as expected, revenues from advisory services and equity brokerage moderated during the quarter. Revenues on a year-to-date basis totaled $835 million, up 53% compared to the prior year, reflecting the investments we have made through our acquisitions and organic growth from the market leadership we have achieved in many of our businesses. We remain well positioned to serve our clients in more ways than ever while generating strong financial results for our shareholders. Turning to operating expenses. Our compensation ratio for the third quarter of 2020 was 61%, down from the sequential quarter as the result of strong performance and an improved outlook. Our compensation ratio is largely variable to revenues, and we continue to manage compensation levels while considering investments, employee retention, and business outlook. This can drive some additional variability in our compensation ratio from quarter to quarter as we have seen this year. Our year-to-date compensation ratio was 63%, and we expect that on a full-year basis, our comp ratio will end the year near this level. Non-compensation expenses for the third quarter of 2020, excluding reimbursed deal expenses, were $42 million, reflecting the continued pause on travel and entertainment as well as lower trade execution and clearing expenses from reduced equity volumes. On a year-to-date basis, excluding deal expenses, non-comp costs were $138 million, up 28% over the prior year compared to a 53% increase in revenues. We expect non-comp expenses to remain at or close to these levels in the near term, and we will continue to actively manage costs as they are an important driver of margin expansion. For the third quarter of 2020, we generated an operating margin of 20.4%, a 270 basis point improvement from the second quarter. Our operating margin for the first 9 months of 2020 was 17%, up 240 basis points over the prior year period, driven by the increased scale of our platform and the successful integration of both Weeden and Sandler. Our tax rate for the third quarter of 2020 was 26.9%. On a year-to-date basis, our tax rate of 23.7% reflects income tax credits recorded in the first half of 2020 related to provisions in the CARES Act. We continue to expect our tax rate will be within our targeted range of 26% to 28% going forward. We generated $2.38 of diluted EPS for the third quarter of 2020, an increase of 23% on a sequential basis, driven primarily by record revenues and our improved margin. Diluted EPS on a year-to-date basis was a record $5.73, up 28% over the prior year, resulting from our strong revenues, expense discipline, and the accretive impact of our acquisitions. Now turning to capital. Our capital and liquidity positions are strong, and our leverage remains low. For the first 9 months of 2020, we generated $103 million of adjusted net income, up 59% over the prior year, reflecting our scale and ability to generate significant amounts of cash from operations.

Chad Abraham, CEO

Turning to dividends. Given our strong performance and improved outlook, the quarterly dividend will return to pre-pandemic levels. The Board approved a quarterly dividend of $0.375 per share to be paid on December 11, 2020, to shareholders of record as of the close of business on November 24, 2020. On a full-year basis, we expect to maintain our dividend policy of returning 30% to 50% of our adjusted earnings through a special make-whole dividend paid in the first quarter of each year. Consistent with the prior year, we anticipate the payout ratio for fiscal year 2020 to be at the low end of the range. We are pleased with our strong results for the first 9 months of 2020. Our combinations with Weeden and Sandler have added material scale and operating leverage to our business. We remain focused on investing in our business to grow revenues and earnings. With significant opportunity to grow market share across cycles, our proven financial performance and leadership across several franchises, we believe we represent a unique opportunity to drive shareholder value over the long term. Thanks, and we can now open up the call for questions.

Operator, Operator

And your first question comes from the line of Devin Ryan with JMP Securities.

Devin Ryan, Analyst

Maybe to start here on some of the commentary on the M&A outlook. Just be great to put a little bit of a finer point on the tone for business right now and how it's recovered over the past few months. And I'm really just trying to get a sense of whether we're back to, call it the pre-pandemic pace or what feels different today if we're not. And just also the deals that you're seeing, are they deals that were temporarily put on hold with the pandemic? Or are you seeing deals maybe even pulled forward because of potential tax changes that come with the different administration? Just trying to get a little more flavor for what you guys are seeing in the M&A outlook.

Chad Abraham, CEO

Yes, thanks, Devin. I believe we are feeling more optimistic about the M&A pipeline and what we're observing, which began to change at the end of summer and into September, and it has persisted. As mentioned, it's a mix of both. We've certainly restarted some deals that were previously on hold, and we also have several new opportunities. The interesting point will be that September and October have been very active, with many deals initiated, and it will be a race to see how much we accomplish by December and how much will carry over into Q1. Regarding the tax issue, there are indeed a few transactions motivated by the desire to finalize something this year, but that's not the majority. As for whether we are back to pre-pandemic levels, I think we've made significant progress, but it's not uniform across all sectors. So, I wouldn't say we're back to pre-pandemic rates; however, it is definitely an improvement compared to what we've experienced.

Devin Ryan, Analyst

Okay, terrific. Very helpful. And then just another one here just on potential implications of the election next week and to the extent there's a changed administration and obviously, people are talking about the potential for higher tax rates. Any thoughts around how that could impact the public finance business? It was clearly, when we had tax reform, kind of a big topic of conversation. And so anything that you guys are gearing internally around potential for changes that could impact the munis underwriting business or on the trading side as well?

Debbra Schoneman, President

Devin, I think the main aspect that impacts is really the appetite for municipals relative to other products, and so that's where we may have seen some decline historically, although maybe not even as much as we may have anticipated. So while it is part of the discussion around what could be helpful for the business going forward, I wouldn't say it's been a dramatic topic that we've talked about, but obviously, would have some positive impact just on the appetite for that security.

Chad Abraham, CEO

Yes. I would like to add that in public finance, we have experienced a very strong nine months, with many people taking advantage of low interest rates. Depending on the election, there is a strong possibility that next year could see significant infrastructure spending. Despite many public entities refinancing, there is a compelling case that next year will be very active with numerous projects and, quite frankly, continued low tax rates.

Devin Ryan, Analyst

Got it. Okay. And then just another one here on the brokerage business. I think this environment has really validated the business model and the diversification and resiliency of your model. And clearly, coming into this year with the volatility, as the investment banking outlook maybe soured a bit even though it's, I think, done better than people thought, the brokerage business has been tremendous and picked up a lot of slack here. And what I'm trying to think about is the fact that you have a couple of acquisitions in here, it kind of makes the comparisons relative to last year difficult as we're trying to think about what maybe a more normal brokerage backdrop could look like to the extent volatility does decline if that's the assumption we want to make here. So is there any way to think about kind of what a pro forma the business has done over the past 9 months relative to last year, if you were to include the acquisitions last year? And how are you guys thinking about the potential for that business to potentially moderate if, obviously, the environment improves and some of the other businesses that are procyclical continue to improve like M&A?

Debbra Schoneman, President

Yes. I'll take that, Devin, and I'll take it in 2 pieces, both equity and then fixed income. On the equity side, we definitely benefited from the market in Q1, obviously, with the extreme level of volatility. When we originally talked about the combination of really all the businesses, we spoke to that because there wasn't good historical data to it being somewhere around a $130 million business. What I would say is, we are seeing less dissynergies than we may have originally anticipated. And so I think if you look at the last 2 quarters run rate here after we got past the volatility of Q1, you're going to see something that's a little more normalized. I mean, to your point, will ultimately depend on the level of activity in the market, but just to give you some sense of that. On the fixed income side, we had talked about that nearly doubling our revenue. I think we had somewhere around an $80 million business in 2019, prior to the Sandler acquisition. And here too, I would say, while the market has been very conducive to fixed income business, you're seeing a lot of prepayments, refinancings, driving cash into our clients' balance sheets and portfolios and their need to redeploy that, trying to go out a little in duration to capture some yield that they're losing through that due to refinances and prepayments. So there is a conducive market. The other thing I would say, though, is we have done a lot of work to fully combine the fixed income businesses, integrate the trading desk and integrate the analytics team so that we're able to capture and leverage the complementary, both products and skill sets across the expanded client base. So that one is a little trickier for me to determine exactly how much is market-driven, given what I spoke to versus having the 1 plus 1 equal 2. But I would say we continue to believe, at least as we go into 2021, that we'll see the strength that we're seeing today.

Devin Ryan, Analyst

Okay. Just last one here on thinking about operating margins moving forward. And appreciate this quarter, maybe the comp ratio was a little bit below normal as the outlook for the full year improved, and so there was some adjustment there. But the firm generated over 20% operating margin, so I'm trying to think about kind of where that margin can go. Is 20% a level that you potentially could be operating at as we look out and then if we were to assume the revenue backdrop remains healthy? And what I'm getting at is the mix of business may shift around a little bit, and so the bigger driver probably is on the comp ratio here and trying to think about, can the comp ratio move down from the 2020 level and is around 20% operating margin, maybe an aspirational-type level? Or is that a reasonable level that the firm could be operating at in a better revenue backdrop?

Timothy Carter, CFO

Yes. Devin, maybe I'll take that. I think you certainly see the leverage that we can get in the business as we did this quarter. I think it's also informative to think about it from a year-to-date basis and at a 17% level. That margin has continued to move up over the last several years. But I do think, if you look out a couple of years, a 20% margin is where we're marching towards. And I think you're right in terms of thinking about the comp ratio, I mean, for this year, yes, we're likely to end within our guided range. But if things begin to normalize, we're always thinking about investment and what we do through the comp ratio, but there is an ability, I think, if things normalize, that you can think of next year, maybe moving towards the lower end of that range and you continue to get some leverage through the comp ratio. But that's always going to be a little dependent on what we're doing from an investment standpoint and how we think about the business. But yes, getting to a 20% margin is sort of where we're moving to.

Chad Abraham, CEO

Yes. I would just add that when we announced the Sandler deal, we felt a conservative operating margin range of 17% to 19% was realistic, and reaching 20% seemed aspirational at that time. In the current operating environment, with some ongoing expenses and increased scale, we've realized that we would be pleased with achieving $300 million quarters, which we've approached in the last few quarters. All of these factors have shifted our perspective, and we now believe we should aim for multiple quarters with a 20% margin. It may take a year or two for that to become consistent and reflected on a full-year basis, but we have definitely adjusted our target accordingly.

Operator, Operator

Your next question comes from the line of Michael Brown with KBW.

Michael Brown, Analyst

So capital raising has just remained red hot, and it really sounds like it can continue here. So I think the challenge is really, how long can it go. And so what I was interested in hearing from your perspective is, what is kind of the bull-bear case here that could cause levels to stay where they're at or even accelerate? And what could cause it to just kind of fall off from here?

Chad Abraham, CEO

Yes, for us, it is very industry-specific. The level of stimulus and available capital, combined with limited investment opportunities, is definitely driving money into the equity markets and increasing valuations. Specifically, we need to consider where we are generating most of our business. The largest segment for us, by a significant margin, is health care, which constitutes the majority of our ECM revenues. It is essential to have insight into the health care market. We have observed a long-term trend of emerging technologies and positive developments in the biotech sector, with investors who have profited still holding substantial capital. Therefore, we remain optimistic about our health care market and innovation. However, if I were to foresee a downside scenario, increased regulation in health care could lead to extensive discussions about drug pricing and negative impacts on health care stocks, which would adversely affect our financing in that sector. Another aspect of our financing business that is performing exceptionally well is the financing from numerous small and medium community banks, mostly through debt financing, where we hold a significant market share. We believe we are still in the early stages of this trend, as many banks have yet to refinance. These are our two primary areas of focus. While we also see great opportunities in technology, particularly with tech stocks, software, and new IPOs, some question whether this represents a financing bubble and if it will last one or two quarters. However, given the stimulus and available capital, it seems likely to have further momentum.

Michael Brown, Analyst

Yes. Great. I appreciate the color, Chad. I wanted to ask about your fixed income trading business. I guess what I'm trying to think about is the operating backdrop for fixed income next year. And you talked about the Fed committing to low rates through '23, and so how does that lower rate environment play out for you and your mix on the fixed income side? And then as we think about the transition away from LIBOR, do you expect that to drive elevated trading activity in 2021?

Debbra Schoneman, President

So first of all, just on the overall lower rates, I think this is really going to be a function of, as I was speaking to before, the amount of refinancing and prepayments on the mortgage side that continue to come in. And so if these rates stay low, we do expect that to continue, which obviously also is a function in the capital raising side, as Chad was speaking to on the corporate debt and also in our municipal business, which tends to have a helpful impact on the overall trading environment when you're having a strong issuance. Relative to LIBOR, I think for our business specifically, I don't see it having a huge impact in our trading activity going forward, so I guess that's what I would say about that. Not a huge impact.

Michael Brown, Analyst

Okay. Great. I appreciate the color on that. I wanted to ask about capital return. So going into the pandemic, you guys reduced the dividend, you had very conservative action at that time. And as a result, it really exceeded expectations, you've now brought them back to where they were pre-COVID. So one, how should we think about your capital return plans going forward? And then two, just from RC, given the difference between the adjusted net income and the GAAP net income, from RC, how should we think about what your capital return potential is in terms of buybacks and dividends if we're thinking about like a payout perspective?

Chad Abraham, CEO

Yes, I'll start and then let Tim take the next part, Mike. Our perspective has returned to where we were. We need to utilize all available tools. Given our scale and the cash we are generating, we are definitely considering buybacks, the regular quarterly dividend, and special dividends, while also looking to deploy capital through investments and acquisitions. We have used a significant amount of excess capital for Sandler and Valence, which impacted our buyback plans and other capital uses. However, we are now back to generating a substantial amount of cash. In hindsight, some may question whether we should have cut the dividend; we were being conservative based on the situation at that time. Currently, our view is that we need multiple avenues for deploying cash. Our decisions will depend on the larger opportunities in acquisitions and investments, but we will keep assessing our quarterly dividend rate. We have stated that we will continue to pay the special dividend and remain active with buybacks.

Timothy Carter, CFO

Yes. Mike, regarding GAAP versus non-GAAP, the GAAP expenses are largely driven by our acquisitions, which involve non-cash amortization charges, whether from deal consideration or intangible assets. These factors are crucial as we assess our ability to deploy capital based on our adjusted non-GAAP results. This framework guides our dividend payout ratio of 30% to 50%, taking these items into account from a GAAP perspective. Ultimately, our focus is on cash generation, which provides the capital we can use for deployment.

Michael Brown, Analyst

Okay, great. So considering the payout ratio of 30% to 50% in relation to the adjusted earnings is the right perspective. I also wanted to follow up on the non-GAAP adjustments. Regarding the acquisitions of Sandler, Valence, and Weeden, I believe that many of the restricted stock considerations and retention will expire in roughly three years. Can you confirm if that's accurate? Additionally, how does the amortization of intangible assets typically decrease over the next two years? I just want to ensure that I have all the details correct.

Timothy Carter, CFO

Yes, Mike. So you're right. In terms of the deal consideration, we've got things going out sort of 3 to 5 years. A lot of that is more heavily weighted over the first 3 to 4 years. So you'll see that come through in a little bit more of a recurring way over that time period. I think on the intangible, more specifically, that can become a little bit longer term, but it's much more front-end weighted. So you see a significant component of that come through in the first 2 years and then it drops off significantly after that.

Michael Brown, Analyst

Okay. Great.

Chad Abraham, CEO

Yes. Mike, I would just say, said another way, over the next 4 or 5 years, you'll see the GAAP and non-GAAP converge.

Michael Brown, Analyst

Right. Great. On the topic of capital return, I wanted to address the potential for further acquisitions. Now that you've integrated the Sandler, Valence, and Weeden acquisitions, are you considering looking for additional bolt-on acquisitions, or are you focused on extracting synergies from those acquisitions and feeling satisfied with your current strategic mix?

Chad Abraham, CEO

Yes, I think what I mentioned last quarter still holds true: everything is going quite well. We believe that our active approach has equipped us to integrate acquisitions effectively and create opportunities from them. We're quite pleased with the results, especially considering our strong track record over the past few quarters with Sandler and Weeden. That said, we are mindful of the significant initiatives we undertook, so it seems unlikely that we will pursue larger transactions in the next couple of quarters. However, we will remain opportunistic, continuing to explore smaller boutiques and opportunities that enhance our product and industry expertise, particularly in areas where organic growth may not suffice. Given our strong performance in revenue and cash generation, we feel we are positioned well to remain active over the next six to nine months, though our focus will likely be on smaller deals.

Timothy Carter, CFO

And Mike, maybe just as a follow-up to that. Related to the dividend payout ratio, 30% to 50%, I mean, we certainly take into consideration what we're thinking about from an acquisition perspective. I mean Chad referenced on your first question around all of the levers. I mean, it's the dividend, it's the buybacks and it's the ability to have capital to do acquisitions. So we think about all of those in combination when we set some of these levels.

Operator, Operator

And your next question comes from the line of Mike Grondahl with Northland Securities.

Mike Grondahl, Analyst

Congrats on the quarter. 3 questions, and I'll just maybe ask them all. One, the M&A pipeline today, how does that kind of compare to maybe the 3-year average? Are you kind of sitting at 60% of it, 90% of it? Secondly, I saw you recently led a SPAC deal in the financial services area, kind of what's your thought on that area going forward? And any thoughts on maybe a health care deal or an energy deal? And then lastly, clearly, there's less travel going on with COVID. Do you think that's affecting the business at all? Do you think you didn't get on any deals because of a lack of travel? So those three, if you don't mind.

Chad Abraham, CEO

Yes, I'll address those in order. Regarding the pipeline, it has grown significantly over the past couple of months. While I don't believe it has returned to the levels we experienced in January, it's probably close. For certain industry teams, it has fully recovered or even surpassed previous levels, but in some sectors, it is not yet operating at full capacity. A key area where we have a strong presence is private equity, and I would note that in the second quarter, we were not seeing much activity in that space. However, in the third quarter, activity has really picked up, with private equity being very active in pursuing transactions. It will be interesting to see how this evolves. We are aware that a lot of this will rely on the developments regarding the virus, lockdowns, travel, and the way private equity approaches deals in the upcoming months. If the trends of the last few months continue, I believe we will have a fully active M&A pipeline relatively early next year. Secondly, on the SPAC question. Yes, we did a SPAC in financial services. I think you know this, but this has been an incredibly active year. We do not have a history of doing a lot of SPAC transactions. We're much more active now, the markets become much more mainstream. You look at the investors in the SPACs, that has certainly evolved, and the list is much longer. Some of that's just being driven by there's so much extra liquidity in cash that it's viewed as a good place to put your money. So I do think parts of that market are here to stay. Where we're going to participate is where we really believe in the management teams where we have experience with those teams and in sectors that we know incredibly well. So you sort of said, would we look at energy and health care? Yes. We did this one in financial services. So those are the logical places where we've got that expertise and those relationships with the team that we will be active. And the last question? Oh, yes, the last question was travel. Yes. That's still at really low levels. I will say, in Q4, I'm definitely seeing more and more bankers, more research analysts, more sales people travel. Certainly not everybody and certainly not every client base is sort of open to that. I think I've said this before, I do think there is roughly half of our travel that will only come back in some capacity or some fraction and then some half of our travel that will come back in a big way. I had a couple of conversations with certain bankers this week, and they were traveling every week and having no problems with clients wanting to see them and felt like that was a real competitive advantage. So we're obviously staying very flexible with what our clients want, what our producers want to do. But as I said, I don't think that expense will come back the way it was. I think there will be permanent savings, but I don't think our current run rate is going to stay where it is.

Operator, Operator

And we have no further questions on the phone lines. I'd like to turn the call back to Mr. Abraham for any closing remarks.

Chad Abraham, CEO

Okay. Thanks, operator. We're very happy with our results through the 9 months, and we're encouraged that we're seeing increased advisory activity. We very much look forward to updating you all in Q4 and our full year 2020 results early next year. Thank you, everyone. Have a nice day.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.