Q4 2023 Perella Weinberg Partners Earnings Call

Participants

Taylor Reinhardt; IR; Perella Weinberg Partners LP

Andrew Bednar; CEO, Director; Perella Weinberg Partners LP

Alexandra Gottschalk; CFO; Perella Weinberg Partners LP

Devin Ryan; Analyst; JMP Securities

James Yaro; Analyst; Goldman Sachs

Presentation

Operator

Good morning and welcome to the Perella 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.

Taylor Reinhardt

Thank you, operator, and welcome all. Joining me today are Andrew Benson, our Chief Executive Officer, and Alex Scott jog, Chief Financial Officer.
Before we begin, I'd like to note that this call may contain forward-looking statements, including P. WPP'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 PDP'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 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. Pwc has reconciled these items to the most comparable GAAP measures in the press release filed with today's Form eight K, which can be found on the company's website.
I will now turn the call over to Andrew Gardiner to discuss our results.

Andrew Bednar

Thank you, Taylor, and good morning. Today we reported 2023 full year revenues of $649 million, up 3% from a year ago, with fourth quarter revenues of $213 million up 16% from a year ago and a large contributor to our strong full year performance. We're pleased with how we navigated 2020 three's challenging market environment, growing our revenue while the M&A market globally saw closing down 30%, 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, the resumption of growth in the traditional M&A markets has begun. Our financing and 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 a response in part to the higher interest rate environment and increasing complexity in financing markets and also the 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 remains essential ingredients to our success in 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 and 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 a managing director to our team in Europe and have a US-based partner expected to join the firm during the second quarter. Our journey to $1 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 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 2020.
For Alex, I'll now turn the call over to you to review our expenses and capital management.

Alexandra Gottschalk

Thank you, Andrew. Our adjusted compensation expense represented 70% of revenues in 2023, exactly as we indicated in December, approximately 3% above 2022. And we believe appropriate, given the industry response to market conditions and our continued targeted investment in talent through cycles.
Our adjusted non-compensation expense was $144 million for the full year 2023, up 17% 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 because 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 in 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.

Question and Answer Session

Operator

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 Ryan with JMP Securities. Please go ahead. Your line is open.

Devin Ryan

I'm great. Thanks so much. Good morning, Andrew and Alex, who worry for you doing great. I guess wanted to start with a big picture question, Andrew, you 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 where you grew revenues when most were down pretty meaningfully. You mentioned the backlogs at a record as well. So as we look out over the next couple of years, how would you contextualize Pro Line Bird's ability to kind of grow faster than the broader M&A market? And just trying to think about whether it's you know, that 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 whitespace. Just love to get some of your thoughts on kind of that algorithm of growth from here, we operate seven.

Andrew Bednar

So we do think that the growth algorithm for the firm is quite different than some of it appears to have larger scale so as I mentioned in my 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 offerings. So 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, and I think that will be the case for some time. It's also the case that when we are adding partners and we haven't reached a point of conflict or saturation with other parts of the business. Then 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 requirements they bring, but rather in hands of all of the firm where they can leverage our restructuring, liability management, shareholder activism and analytics our financing advisory debt advisory practice as well as our M&A business. So we're just not at a point where we're adding partners and two to potentially get some synergy 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.

Devin Ryan

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

Andrew Bednar

Yes, look, comp is something we look at very, very carefully on and we have to get that right because it's a multivariable equation where not only are our team's effective, but also our shareholders. And as you know, we as partners and employees own about 50% of the firm. And so we're very incentivized and aligned with our shareholders and making sure that we get the comp ratio just right. We thought this year, given our investing and given the state of the market and what some of the competitive responses were in the marketplace regarding compensation that it was prudent now to take up the margin a bit on the 300 basis points. What we exactly what we signaled we would do back in December. So that we took out surprise from our announcement today that we thought that was the prudent sharing of some of the investments that we've made and some of the other inflationary pressures that we do see now when we go down our comp stack and again, I said in the past that some of comp is really CapEx. When you think about it, I know I say it every time. I'll never win the argument 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 rebound. So we think we've made prudent investments in new people from these investments in helping large, but future productive talent ramp up in our system as well as pay those. We've had a highly productive years and again, sharing that burden with our shareholders. But recognizing we to our shareholders, yes, absolutely. Okay.

Devin Ryan

Great. I'll leave it there, but thanks so much

Operator

Tthen we'll take our next question from Steven Chubak with Wolfe Research. Please go ahead. Your line is open. Good morning.

This is Brandon O'Brien filling in for Stephen. As to size your comments on the backlog being at record levels is encouraging, but you seem to imply that restructuring and liability management comprised a greater percentage of that backlog than usual. So I just wanted 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?

Andrew Bednar

Yes. Thanks for the question. No, that's not the case. Actually, our M&A backlog of announced and pending closing transactions, that specific backlog is up much more in M&A than it is in infrastructure and the pipeline of both restructuring and M&A are up. So those two pipelines are up from where we stood last quarter and where we stood last year. So that I'm glad you asked the question and phone, but I had the opportunity to clarify that to be announced. And pending backlog is largely driven by an increase in M&A.

And that's helpful color. And I guess now 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 strength in China, strength in the performance of the region as well. So I just wanted to get a sense as to whether this was consistent with what you're seeing in the business and whether there's any difference in the tone of discussions or pace of activity between the U.S. and Europe?

Andrew Bednar

So I think we see that the tone and pace of activity to be consistent with what our peer group is reporting. And I think the on-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 got a bit of a lag on some of our larger transactions and bringing them to market tend to announcement. And so we probably had less recognition into revenue in 23 from our European business than would otherwise be suggested by the lower level of activity. But we're quite encouraged by the increase in engagements as well as in our overall dialogue in Europe.

Great. Thank you for taking my questions.

Operator

We give we'll take our next question from James ERO with Goldman Sachs. Please go ahead. Your line is open.

James Yaro

Good morning and thank you for taking my questions. I just wanted to start with them to about some of the productivity numbers for you. I think we do see some of the historical data 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 the mid-teens millions level like what we saw in 2018 and 2021 or closer to $10 million like we saw in 2017, 1922.And this.

Andrew Bednar

Yes, James, thanks for the question. So we are definitely moving up and seeking to move up in our overall productivity per partner. And this year we came in around $10 million last year. With similar, as you mentioned, '21 and 1'8 were more like $15 million. We certainly aspire to be in the $15 million 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. Then 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 employees, 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 and those partners who are recently joining the firm or have been recently promoted where again, the ramp up business has been more gradual and those tend to bring down your productivity metrics, but they're also the build the inorganic opportunity to grow revenue over time.

James Yaro

Okay. That makes sense. And maybe just a related one on the investment, a quick one. Just maybe could you give us the partner count 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 expectations for next year in '25?

Andrew Bednar

Yes. So the partner count is at 64, and we expect to be active in recruiting in '24 as we had been in '23. And before that, we haven't participated in the 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 partner would bring to the firm that 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 very healthy pipeline of potential candidates, but we think being disciplined there is a prudent and a proper way to grow our firm.

James Yaro

It makes sense. Thanks a lot. Thank you.

Operator

As there are no further questions on the line at this time, I'll now turn the call back to Andrew Butler for closing remarks.

Andrew Bednar

Well, 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 taking to our clients for their trust and support. And thank you to our analysts and investors for your interest and Perella Weinberg Brinker during today's call and we'll speak again in May. Thank you.

Operator

This does conclude today's program. Thank you for your participation, and you may now disconnect by mail for point.