Moelis & Co Q3 FY2024 earnings call

Market Trends

• Gradual improvement in the M&A market throughout the year with equity market valuations at or near all-time highs and the Fed moving towards lower interest rates, though transaction completion times remain longer than in a full bull market.
• Capital structure advisory business has elevated activity with a prolonged restructuring cycle expected due to non-investment grade debt maturing.
• Rise of private credits allows competition with legacy banks in arranging capital, with strong demand for structured capital solutions.

Talent

• Recently added a Biotech MD set to join next month, with active recruiting efforts and selective talent addition in strategic areas to deepen expertise across products, sectors, and regions.

In the third quarter, Moelis & Company reported $281 million of adjusted revenues. For the first nine months, adjusted revenues were $763 million, up 18% from the prior year period. Year-to-date revenue distribution is approximately 60% M&A and 40% non-M&A. Third quarter compensation expense was accrued at 75%, non-compensation expenses were $48 million with a similar expectation for quarter four. Underlying corporate tax rate was 34% consistent with prior quarter. The firm has $298 million of cash and no debt. In terms of segment contribution, M&A was approximately $60 million and other segments were about 40% of revenue this quarter.

Fourth Quarter

• Comp ratio in fourth quarter is dependent on fourth quarter revenue; pipelines and announced transactions are at all-time highs, suggesting potential leverage in Q4.

2025 Outlook

• '25 is expected to be a good year, influenced by activity levels picking up, but also dependent on the ability to raise capital in the LP market, which may be tied to interest rates and capital allocation in private equity alternatives.

• Forward-looking statements are subject to various risks and uncertainties identified in SEC filings.
• Delayed transaction completions due to multiple factors including regulatory processes, internal fundraise dynamics, and longer vetting periods in both public and private markets.
• Talent retention and acquisition pressures in specific segments if there are shortages.

Q: First question just on comp ratio, kind of near-term and then intermediate-term.

A: Kenneth Moelis and Joseph Simon discussed that comp ratio in fourth quarter is dependent on Q4 revenue, pipelines and announced transactions are at all-time highs, and the algorithm of 4-5 points per $100 million of revenue still holds barring significant hiring.

Q: Just on the interplay M&A with interest rates.

A: Kenneth Moelis talked about the impact of interest rates on M&A, mentioning that while rates are moving down, the ability to raise capital in the LP market is also a factor.

Q: If we have our chat a year from now and activity was so rather than great, what are the likely drivers of expectations that a reality that fall short of expectations next year?

A: Kenneth Moelis said it could be related to the ability to raise capital in the LP market, which may be tied to interest rates and capital allocation in private equity alternatives.

Q: As we're thinking about the coming quarter, do you expect that, we'll be seeing the typical seasonality and a stronger fourth quarter than what we've been seeing here year-to-date?

A: Kenneth Moelis said the business seems to be gradually getting better each quarter, with some seasonality but also influenced by external factors like elections and Fed actions.

Q: I just wanted to talk about headcount. While your MD count is down slightly year-on-year, your employee count is up nearly 20% with a fairly significant increase quarter-on-quarter in 3Q.

A: Kenneth Moelis and Joseph Simon discussed that headcount changes are due to various factors like exit timelines, garden leave, and managing headcount over time.

Q: I guess for my follow-up, I just wanted to touch on capital allocation and specifically whether you would consider doing an acquisition to accelerate growth.

A: Kenneth Moelis said he's not averse to acquisitions if it makes sense in terms of price, culture, etc., but it's difficult to do large-scale acquisitions.

Q: How is activity been holding up there? And when we think about the next 18 months, how do you expect restructuring activity to progress?

A: Kenneth Moelis said restructuring activity will be more liability management than traditional restructuring due to open capital markets and available capital for liability management.

Q: Ken, maybe just a follow-up on your M&A comments or large team lift-outs. Curious how you would characterize appetite for not just like traditional M&A bankers, but maybe some of the non-M&A capabilities.

A: Kenneth Moelis said they have ambitions to grow in non-M&A capabilities like private capital advisory and primary fundraising, aiming to be a valuable provider to the private equity community.

Q: Just on the comments around longer lag to complete transactions. Can you just give us an update on what's still driving that?

A: Kenneth Moelis said longer lag to complete transactions is due to a combination of regulatory, internal fundraise dynamics, and other factors.

Q: Just on the comments around longer lag to complete transactions. Can you just give us an update on what's still driving that?

A: Kenneth Moelis said longer lag to complete transactions is due to a combination of regulatory, internal fundraise dynamics, and other factors.

Q: I think we've seen a couple of recent successful sponsor IPOs. Is that something that's starting to come up in your dialogues with private equity and do you think that's something that could lead to more activity either in ECM or M&A in that part of the market?

A: Kenneth Moelis said there will be more sponsor IPOs, and with the stock market at all-time highs and interest rates coming down, an IPO market could develop if there are quality products at the right price.

Q: Maybe any way you could just size the percentage contribution to revenue this quarter from restructuring and capital markets versus M&A?

A: Kenneth Moelis said M&A was about $60 million and all the other segments were about 40% of revenue this quarter.