Perella Weinberg Partners Q3 FY2024 Earnings Call

Good morning and welcome to the Perella Weinberg Partners Third Quarter 2024 Earnings Conference Call. Please be advised that today’s call is being recorded. And I will now turn the call over to Taylor Reinhardt, Head of Communications and Marketing. You may begin.

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 Perella 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 Perella Weinberg’s most recent SEC filings for a 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. Perella Weinberg has reconciled these items to the most comparable GAAP measures in the press release files of 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.

Thank you, Taylor, and good morning. We are pleased to report another quarterly record for the firm. In the third quarter, we reported revenues of $278 million, up 100% year-over-year. Our year-to-date revenues at $652 million are up 50% year-over-year and are the highest first nine months in the firm’s history. With our fourth quarter revenues tracking at a similar level to those seen in Q4 2023, we remain on pace to deliver strong results for the full-year 2024. Our results reported today reflect top-line growth across our businesses driven by an increase in larger fee events. This is an encouraging trend and reflects both our deliberate strategic positioning and business selection optimization, as well as a deepening of trusted relationships with both new and existing clients. Our team is firing on all cylinders, and the results speak for themselves. I could not be more proud of our teammates and what they have achieved. Our business momentum signals that we are in the early stages of a multi-year growth cycle in the transaction markets. Corporate activity, which supported our franchise through the down cycle, has accelerated. While announced activity from sponsors continues to lag corporates, the desire to transact among sponsors is increasing. At the same time, restructuring and liability management support and the need for creative financing solutions remain in high demand. We are seeing these trends across industries and geographies and believe we have increasingly strong tailwinds at our back. Across the firm, we are investing in growth. Since our last call, we have added two partners with client coverage in consumer health, wellness, beauty, and personal care, and in transportation, leasing, and logistics. These investments in talent, plus others made in prior years, are investments in client relationships and are already yielding results. We have also continued to invest at the managing director level, bolstering that rank with two additional hires to deepen our client coverage and strengthen our internal partner pipeline. Our performance to date in 2024 reflects an improving operating environment but represents the underlying strength of our client-focused franchise. We are successfully executing on our strategy to achieve scale while simultaneously solidifying our position as a leader in providing independent advice, especially in larger and more complex situations. Simply put, we are achieving what we said we would, and we feel no constraint. Rather, we see an exceptional opportunity to drive long-term growth. We look forward to continuing to deliver superior results for our clients and increased returns for our shareholders. Alex, I will 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 nine months was 68% and continues to represent our estimate for our full-year accrual. Our adjusted non-compensation expense was $38 million for the third quarter and $116 million year-to-date. Adjusted non-compensation continues to trend approximately 10% above last year’s level, entirely in line with our expectations. Our adjusted tax rate was 29% for the first nine months, and we now anticipate that our tax rate for the full year will be below 30%. At the end of the third quarter, we had 57 million shares of Class A common stock and approximately 31 million partnership units outstanding. Compared to our share count at June 30, our public float increased 9%, while our total shares outstanding only increased 3%, resulting in part from the divesting of stock-based compensation units and from partnership units electing to exchange into Class A common stock. We remain committed to managing our share count to mitigate dilution from stock-based compensation. Year-to-date, we have retired more than 12 million shares and share equivalents through a combination of repurchase, unit exchange for cash, and net settlement. We ended the quarter with $335 million in cash, cash equivalents, and short-term investments, and no debt. This morning, we declared a quarterly dividend of $0.07 per share. With that, operator, please open the line for questions.

We’ll take our first question from Devin Ryan with Citizens JMP. Please go ahead.

Hi. Thanks. Good morning, Andrew and Alex. How are you?

Yes. Good morning, Devin.

Good morning.

I just want to start on just kind of big picture on revenues. Obviously, it’s been a great start to 2024. We’re up 50% year-to-date against a backdrop of pretty modest growth in M&A, and that’s obviously pretty significantly outperforming other independent investment banks. So, I’d love to just dig in a little bit around what you would attribute the degree of outperformance to. And then, Andrew, you mentioned the business is hitting on all cylinders, but at the same time, we’re kind of in the early innings of a recovery. So, I’d just love to kind of maybe think about the growth algorithm from here and how you guys are feeling after what’s a great start to the year? Thanks.

Yeah. Thanks, Devin. Look, we’re feeling good, and certainly the events of this week give us even more optimism that we’re going to see continued increasing activity in the transaction markets that we’re in. I think that’s shared by the industry broadly and was reflected in some of the price moves in our stocks, in our industry on Wednesday. We’re closing in on $3 trillion of announced M&A this year, up about 20%. You are correct. We are up more than double that in our business. It continues to reflect our growth story, the fact that we are a smaller scale and a faster-growing participant in our industry. As I’ve mentioned in prior calls, we are really well positioned with where the activity has been, largely dominated by corporates rather than sponsors in this early part of the cycle. I do think that will change over time. We are a bit more weighted toward corporates, and we continue to benefit from that. We’ve also broadened out our suite of services. Often people call them products, but we refer to them as services to our client base. By expanding the product and services set, we’re able to capture more of that wallet and deepen our relationships with clients. So, it’s not any one thing, Devin. It’s kind of everything. Right now, as I’ve mentioned, we’re firing on all cylinders. That doesn’t mean it will be a straight line up to the right. We anticipate turbulence and volatility along the way. But the trends are very, very clear and very accommodative for future M&A activity for sure.

Great. Thanks, Andrew. And then just one on the contribution of the non-M&A businesses, maybe you can pick on restructuring and liability management. It seems like you guys have gained some nice market share there. That doesn’t always get reflected in the data that we can track easily. So, I’d love to just maybe get some perspective around how you would frame how much kind of those non-M&A businesses are contributing in the current environment, particularly restructuring and liability management. And if you could frame that relative to maybe other period and then just given how strong I think those businesses have been, your confidence or your thoughts around the ability to grow these non-M&A advice businesses from here. And can that happen in conjunction with a M&A recovery? Thanks.

Yes, both businesses are growing. And so, both businesses are up. As you know, and I’ve mentioned on prior calls, we don’t operate the businesses as business lines and as product or service lines. We are a client-centric firm. We think about clients, coverage, and geography but within industry coverage as a model for how we operate. We don’t look at product or service line P&Ls. We look at clients and how we’re covering our clients. Expanding the capabilities of the firm when you already have a strong existing client relationship does lead to more revenue opportunities, which we are seeing. I am very pleased with the integrated approach that we have with our restructuring and liability management team, with our debt advisory team, and with our shareholder analytics and engagement advisory team alongside our traditional M&A business. M&A is largely driving the increases that we’re seeing, but it’s very much in tandem with our other service lines and restructuring and liability management being a key one. We don’t make it easy. I know neither does the industry on segmenting that and providing exact detail. But for us, we look at it as a client-centric model, not as a product or service line.

Okay, great. Thanks, Andrew. I will leave it there. Appreciate it.

And we will take our next question from Brendan O’Brien with Wolfe Research. Please go ahead.

Good morning. And thanks for taking my questions. To start, I want to touch on something you alluded to in response to Devin’s question, just on corporate. Corporate M&A has obviously been leading over the past couple of years, leading to some belief that you’re going to see greater acceleration in sponsor activity from here. However, given the expectation for an easier antitrust regime under the incoming administration, I was hoping you could help give us a sense as to how meaningful of an impact the tougher antitrust backdrop has been over the past few years and how meaningful of a tailwind that could be going forward?

Sure. We’ve been in a pretty tough antitrust review environment. I think it’s had two impacts. One is that you’ve seen some transactions be challenged and some terminated. In the context of several thousand M&A transactions a year in the United States, there have only been a couple dozen or so enforcement actions and probably under 20 transactions that have actually been terminated due to an antitrust challenge. There have also been a number of court cases that went in favor of the transaction participants against the FTC and the DOJ. Overall, that part of it has not been the story. The storyline has been the chilling impact that the timeline to closing has created through a stronger muscle from the antitrust regulators. For participants trying to announce and close a transaction, the longer timeline is a high-risk proposition because you don’t know exactly what you’re getting, if it’s going to take a year or more to close the transactions. The risk-reward equation has changed. This has put some transactions on the shelf that I do think will come back. It’s been costly in terms of the timeline to get things signed and closed. I believe that under a lighter-touch regulator, that will be an accelerant for the M&A business.

And for my follow-up, I just want to touch on recruiting. You’ve been running a bit below your recruiting target over the last couple of years. I understand part of that was a conscious choice to undergo the expense initiative last year, but I want to get a sense of what you’re seeing in the recruiting environment today and how we should think about partner growth from here?

Yes, we’re running a little bit below trend. We said when we went public back in June of ‘21 that we have our targets. It’ll be a little uneven, and we’re in an uneven period. We’re seeing a lot of candidates, and we’re encountering some very good opportunities. But partly, people are so busy at their current firms that it is taking longer to initiate, vet, and finally execute and transition to a different firm. Much like what’s happened in the M&A closing pipeline that I just alluded to earlier due to antitrust activity, we see a similar issue in the talent market where it’s just taking longer. But the candidates are out there. I think the proposition to move to a platform like ours is still compelling and offers an exciting opportunity for certain segments of the advisory population. The market for talent acquisition is dynamic, with new opportunities arising constantly. We do agree that we’re a bit on the lighter side in ‘24, but we’re increasing that pace for ‘25.

Great. Thank you for taking my questions.

Thanks.

Thank you. And we will take our next question from Aidan Hall with KBW.

Great. Thanks for taking my questions. Maybe just to start following up there, you talked about broadening out the suite of services and also the recruiting environment. Can you just touch on some of the areas or put a finer point on it of where you still see some of the biggest needs for Perella’s capabilities from kind of building out in white space, if you will? Like where are you really focused on if you kind of had to give a couple priority spots?

Yes, I would say in the near to intermediate term, it’s all about expanding our client footprint. Within our key industry groups, we have an enormous amount of uncovered space. We have a fantastic brand thanks to all the hard work of the team over the last 18 years, and we don't have enough team members to get the brand out into more boardrooms and C-suites. We’ve got a lot of uncovered areas still here in the United States and in Europe, our two key markets. We’re going to continue to build out our team of client coverage bankers. It's probably less about service line or product capabilities. While there may be some additions, we’re very comfortable with how we've built out our capabilities, and now it’s just a matter of getting more client coverage bankers and expanding our client footprint.

Great. That’s helpful context. Maybe just kind of taking that into consideration with the comp ratio in your prepared remarks, talking about multi-year rebound and activity, obviously, the growth has been strong and above tiers to start the year and recruiting has been below trend. How should we think about the leverage in the system right now and maybe just the way to frame growth for 2025 as it relates to the comp ratio?

Yes. Look, we’re heading into the back part of the year. We’ve said 68 is our best estimate for the comp ratio accrual. That’s 2 points down from last year. It is below the peer group, and we are growing faster than the peer group as evidenced by today’s results and the year-to-date results in particular. When we went out as a public company in 2021, we said we’d be in the mid-60s. I think we’re not far off from the target. We’re getting closer to reassessing our comp ratio, but we don’t try to pinpoint that to a revenue number because it’s a multivariable equation. We’re solving for building a world-class business, not for quarter-to-quarter results. In building a world-class business, we’re going to take decisions on talent and investment. This investment includes new talent acquisition and people joining the firm in the near term, as well as new partner promotion and prior talent that has joined the platform that’s taking a bit longer to reach peak performance. Employees and partners of this firm own a significant amount of stock, with over 40% now. We’re very aligned with our shareholders. We consider share count, comp ratio, and return of capital as part of good shareholder alignment. Comp ratio is very much on that list for balanced approaches. I believe we’ve struck the right balance between the growth and investment we’re making and what we deliver to shareholders.

Appreciate the color. Thanks for taking my questions.

Thanks, Aidan.

Thank you. Our next question comes from James Yaro with Goldman Sachs. Please go ahead.

Good morning. Just two quick ones on election-related impacts. I know you mentioned this a little bit earlier. Andrew, if we see a much steeper yield curve, I think some of which has already happened in the past few days, does this impact M&A activity at all? And then I think one of the key questions under the incoming administration is tariffs. Maybe you could just speak to what the potential impact of these could be on your business, if at all?

Sure. Thanks, James. I may be a little bit of a minority on this. I think sponsors will come back, but I do think it’s going to be a bit slower than maybe we would all hope. The rate environment is probably going to be less accommodative than what that part of our market was used to several years ago. The rate picture has changed. We have gone from an increasing cycle to now a decreasing cycle. My view is that there are many continued inflationary pressures. The government is going to borrow and spend more, which will make it challenging to bring down base rates. This will put some pressure on sponsors who will not get the tailwind of financing costs and will have to find value through grinding through EBITDA expansion to drive valuation and exits. It’s not a terrible story. It’s just not as good of a backdrop as I see in the corporate world, which I believe will still continue driving the M&A markets.

Okay. Thank you. That’s very helpful. Maybe just a near-term revenue question. I think you noted that the 4Q ‘24 revenues expect to be closer to the $213 million you noted in 4Q ‘23. I think that suggests revenue will be down sequentially. Could you speak to whether there was any pull forward into this quarter, and separately whether perhaps there was uncertainty ahead of the election that is impacting revenue sequentially?

Yes, we all saw a bit of a slowdown in engagement and activity for a month or so ahead of the election, but not a complete cessation of activity. It’s a minor speed bump on the election. Now, as I mentioned earlier, we have significant accelerants that we haven’t seen in some time; they will more than make up for that brief slowdown. We did pull forward transactions closing in the first two days of the fourth quarter to Q3 based on our accounting policies. This totaled a little over $25 million, impacting how we see Q4. I feel very good about the overall strength of our year-end and heading into ‘25. However, we believe the Q4 period resembles Q4 2023. Overall, we’re on a good trajectory with secular growth, but there will be some unevenness and choppiness along the way; this doesn’t concern us.

That’s very clear. Just a quick one here, I think in the press release you noted that you have 57 million of Class A common stock and 31.2 million of partnership units. Should we read that to mean that you have 88.2 million of end-of-period share count, and that’s the starting point for the fourth quarter? Any other nuances we should consider around the share count going forward?

Yes, that’s a good read. Actually, I will defer to Alex to address that question directly.

Yes, hi James. Yes, that’s correct. The ending share count for the period was indeed 88.2 million.

That’s very clear. Thank you.

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

Okay. Thank you, operator, and thank you everyone for joining us today. We appreciate the opportunity to speak with you and we look forward to executing further on our strategic plan with support from our clients and from you, our investors, and also with the intense focus of our entire team here at Perella Weinberg. We hope you all have a successful end to ‘24, wish you a wonderful holiday season, and we look forward to connecting again on our February call. Thank you.

This concludes the Perella Weinberg Partners third quarter 2024 earnings call and webcast. You may disconnect your line at this time and have a wonderful day.