💰How are the Investment Banks Doing?(Long Chapter 15s?)💰

On Sunday, we wrote about the stellar earnings reports from Evercore Inc. ($EVR) and Houlihan Lokey ($HLI). Are they outliers?

Apparently…no.

PJT Partners Inc. ($PJT) reported earnings this week and they, too, knocked it out of the park. The firm reported a 28% increase in revenues YOY ($167mm) and a 35% increase in advisory revenue ($133mm). These guys are killing it. Regarding the restructuring team, CEO Paul Taubman said:

Revenues grew significantly in the second quarter compared to the prior year and are ahead of last year’s levels for the six-month period. Our Restructuring business maintained its leadership position, ranking Number One in US and global completed restructurings for the first half of 2019. Our outlook for the full year remains essentially unchanged, notwithstanding near record low interest rates, historically low default rates and extremely benign credit conditions, we expect restructuring revenues for the full year to be flat to only modestly down. Despite this muted macro backdrop, we are working on an increased number of Restructuring mandates, which should serve us well entering 2020.

In addition to pounding his chest, Mr. Taubman provided some market commentary as well — particularly with respect to the notion that all of the “dry powder” in the market will impact M&A and distressed situations and Europe:

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💰How are the Investment Banks Doing?(Long Increasing Fees?)💰

Evercore Inc. ($EVR) reported earnings this week and, well, inflation exists somewhere. The company increased adjusted revenue by 18% YOY to $535.8mm. Net income increased by nearly $18mm. The bank reported a decline in the number and dollar volume of its deals but…BUT…numbers nevertheless improved thanks to a strong move in investment banking advisory fees (up 22% YOY). With 81 earned fees of $1mm or more compared to 85 last year, the company appears to be adding clients and raising fees. Because the bank doesn’t delineate restructuring revenues separate and apart from other advisory services, it’s unclear to what degree restructuring is adding or detracting from performance — from either a deal volume or fee perspective. 

Houlihan Lokey ($HLI) also reported earnings; it notched a 14% revenue increase YOY ($250mm) and a 44% net income increase. Financial restructuring revenues increased 57%! Surprisingly, however, the bank noted that “[r]evenue increased primarily as a result of an increase in the number of closed transactions, partially offset by a reduction in the average transaction fee.” Curious. 

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What to Make of the Credit Cycle (Part 5)

Moelis & Company Pounds Chest

In "What to Make of the Credit Cycle (Part 4)," we wrote:

The point is: some opportunistic folk sure seem to think that there’s another cycle coming. And they’re putting their money where their mouth is, thinking that there will be money to be made in the (seemingly saturated) case administration business. Time will tell.

In the meantime, those who can leverage robust M&A activity will. But let’s take a step back…

Do you remember THAT scene in the “Wolf of Wall Street?” The one where Leo and Matty-C pound their chests in the most bro-ey of bro-ey banker moments…? We’re pretty sure this is what the bankers over at Moelis & Company ($MO) were doing before, after and as they were announcing earnings on Monday.

Take this quote for instance:

Analyst: “Ken, I still get plenty of investors that mispronounce the name of your firm, so I guess we’re still working on it.”

Ken Moelis: “There is no mispronunciation, there’s only a wrong phone number. If they get the phone number right….”

Kind of hard to argue with that. Who gives a crap how your name is pronounced if the phone is ringing, the rates are increasing and the dollars are coming in? Marlo Stanfield’s “My name is my name” proclamation in the final season of The Wire clearly doesn’t apply to Ken Moelis. Have to admire that.

So, right after we gave Evercore ($EVR)(which reports earnings today) and PJT Partners($PJT) props in our Q1 review of bankers (to be fair: covering company-side only), Moelisdropped these numbers:

We achieved $219 million of revenues in the first quarter, up 27% over the prior year. This represented our highest quarter of revenues on record. Our performance compares favorably to the overall M&A market in which the number of global M&A completions greater than $100 million declined 14% during the same period. Our growth was primarily attributable to very strong M&A activity in the quarter. We're participating across industries and deal sizes, and we are also earning higher average fees per transaction. In addition, restructuring activity continue to be a solid contributor.

The fee part of this is interesting. Achieving pricing power in this environment is a big accomplishment. Query whether that relates more to M&A and less so to restructuring given the relative dearth of bankruptcy deal flow. Regardless, here’s what the stock did on Tuesday, a day the S&P 500 otherwise declined 1.34% and the Dow was down 424 points:

Source: Yahoo! Finance

When asked about restructuring, specifically, this is what Mr. Moelis had to say:

Well, never expect things to only get better, but it's been - look, it's been a low default environment for a long time. And I think some of the peers and competitors have kind of - who were edging into restructuring might have edged out a bit; we're not. We think we have the leading restructuring group on the Street. They've been together for years and years and years, and now the way we integrate them, the amount of spread we can get using the 120 on these to really make sure that they are talking to companies that are having issues. And those issues could be opportunities, too. It's almost - it crosses over with liability management. It might stay to be a 1% or 2% default rate for a while []. You can never tell. But there's a large amount of paper out there. So even at 1% or 2%, you can stay busy if you have a market-leading restructuring group which we do. Look, it could get worse. I guess nobody could default, but I think between 1% and 0% defaults and 1% and 5% defaults, I would doubt we hit 5% before we hit 0%. So, I'm happy we held the team together, we've added to it, we've integrated it, it continues to be a solid part of our business, and I think it has a lot more upside than downside.

Ok, so this must be a misstatement. He must have meant that he doubts that we reach 0% rather than 5%. And so: A. Lot. More. Upside. In late 2019? Early 2020? Who has edged out? Will others between now and then? The analysts didn’t ask those questions.

2018 Q1 Preliminary Review (Part 3: Financial Advisors)

In 2018 Q1 Preliminary Review (Long Duopolies = Long Kirkland & Weil), we noted the ongoing duopolistic slugfest between Weil Gotshal & Manges LLP and Kirkland & Ellis LLP with respect to company-side mandates. We subsequently noted in 2018 Q1 Preliminary Review (Part 2: Investment Banking) the following,

But then the question becomes, who benefits from this duopoly? In Q1 anyway, it appears that it was Evercore ($EVR) and PJT Partners ($PJT). The former was involved in three of the four Weil cases noted above; the latter in two of the four Kirkland & Ellis cases (as well as two other big Q1 deals, Bon-Ton Stores and Ascent Resources Marcellus Holdings LLC). Notably, Moelis & Co. ($MO) and Lazard Ltd. ($LAZ) were also company-side banker in 3 deals each in Q1. Read: relationships matter and it pays to be at the top of the duopolists’ list.

In the financial advisory world, no firm has worked those relationships for company-side mandates better than...to read this rest of this a$$-kicking commentary, you must be a Member.