Release Date: October 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Moelis & Co (MC, Financial) reported $281 million in adjusted revenues for the third quarter, with a year-to-date increase of 18% from the prior year.
- The company maintains a strong balance sheet with $298 million in cash and no debt.
- Moelis & Co (MC) has seen gradual improvement in the M&A market, with equity market valuations at or near all-time highs.
- The firm is experiencing strong demand for structured capital solutions, driven by the rise of private credits.
- Moelis & Co (MC) continues to actively recruit and add talent in strategic areas, enhancing its expertise across products, sectors, and regions.
Negative Points
- The compensation expense remains high, accrued at 75%, which could impact profitability if not managed.
- The time to complete transactions is longer than expected, affecting the speed of revenue realization.
- There is uncertainty around the impact of interest rates on M&A activity, which could affect future growth.
- The fundraising market for private equity has been slow, potentially impacting future deal flow.
- Headcount has increased significantly, which may lead to higher operational costs if not aligned with revenue growth.
Q & A Highlights
Q: Can you provide insights on the compensation ratio and its potential leverage in the fourth quarter and into 2025?
A: Kenneth Moelis, CEO, explained that the compensation model remains effective, with leverage dependent on fourth-quarter revenue. The market shows energy, with pipelines and announced transactions at all-time highs. Joseph Simon, CFO, confirmed the existing algorithm of four to five points per $100 million still holds, barring significant hiring phases.
Q: How do interest rates impact M&A activity, and do you expect reacceleration with rate changes?
A: Kenneth Moelis noted that while the neutral rate is uncertain, the system moves together. Sponsors are engaged, unlike 18 months ago, but the investment committee's decisions and LP capital replacement slow down processes. Interest rate cuts could restart the process, but the system needs to move collectively.
Q: What are the expectations for M&A recovery in 2025, and what factors could lead to a mediocre recovery?
A: Kenneth Moelis expressed optimism for 2025, expecting a big year barring unforeseen events. The ability to raise capital in the LP market is crucial, potentially linked to interest rates. The reallocation of capital into private equity will be a key indicator of recovery strength.
Q: How is the competitive landscape for hiring, and is there pressure on compensation costs?
A: Kenneth Moelis stated that the hiring landscape feels stable, with talent available and acquisition costs flat over the past 18 months. While certain segments may experience pressure, overall, the market has been stable.
Q: How is restructuring activity expected to progress, and what is the interplay between traditional restructuring and liability management?
A: Kenneth Moelis anticipates more liability management than traditional restructuring due to open capital markets. Chapter 11 is a last resort, with aggressive capital available for extending maturities. Liability management will dominate, driven by the growing credit market size.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
