Evercore Inc. (EVR) Q1 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Evercore first quarter 2017 financial results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference call will be open for your questions. [Operator Instructions] This conference call is being recorded today, Wednesday, April 26, 2017. I would now like to turn the conference over to your host Evercore’s Chief Financial Officer Bob Walsh. Please go ahead, sir.

Thank you. Good morning. And thank you all for joining us today for Evercore’s first quarter financial results conference call. I'm Bob Walsh, Evercore’s Chief Financial Officer. And joining me on the call today Ralph Schlosstein, President and Chief Executive Officer, and John Weinberg, our Executive Chairman. After our prepared remarks, we will open up all for questions. Earlier today, we issued a press release announcing Evercore’s first quarter 2017 financial results. The company’s discussion of our results today is complementary to that press release, which is available on our website at evercore.com. This conference call is being webcast live on the Investor Relations section of the website and an archive of it will be available beginning approximately one hour after the conclusion of this call for 30 days. I want to point out that during the course of this conference call, we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties and there are important factors that could actual outcomes to differ materially from those indicated in these statements. These factors include, but are not limited to, those discussed in Evercore’s filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current report on Form 8-K. I want to remind you that the company assumes no duty to update any forward-looking statements. In our presentation today, unless otherwise indicated, we will be discussing adjusted financial measures, which are non-GAAP measures that we believe are meaningful when evaluating the company’s performance. We have detailed disclosures on these measures and their GAAP reconciliations. You should refer to the financial data contained with our press release, which as previously mentioned is on our website. We continue to believe that it is important to evaluate Evercore’s performance on an annual basis. As we’ve noted previously, our results for any particular quarter are influenced by the timing of transaction closings. I’ll now turn the call over to Ralph.

Thank you, Bob. And good morning, everyone. Roger is traveling today and is unable to join the call. I’m in Europe and John and Bob are in New York. So, if we all start talking at the same time, you will understand why. Let me start by saying that we are pleased with our very strong first-quarter results. In Advisory, we experienced the strongest ever start to a year. The market environment remained favorable and our activity levels were high across diverse industry groups and capabilities, further demonstrating that our investments in talent, broader industry and geographic coverage, and broader product capabilities are delivering value to our shareholders. Our results also demonstrate that our business model of providing senior-level independent, conflict free advice to clients continues to resonate with these clients. Recruiting is off to a solid start in 2017. We've announced three advisory senior managing directors. Masuo Fukuda who will help expand our position in Japan; Ira Wolfson who will strengthen our industrials practice; and Roopesh Shah, who will add to our expertise in restructure. Ira and Fukuda san are already in active dialogue with clients and prospective clients and Roopesh is expected to join us in the next week or so. We continue to have active discussions with a meaningful number of SMB candidates and we are optimistic that 2017 will be another successful year of talent additions. We ended the quarter with 83 advisory senior managing directors. Our Advisory revenues in the first quarter were $130 million above Advisory revenues in the first quarter last year, causing our trailing 12 month Advisory revenues to exceed $1.2 billion. Based on announced Advisory revenues from the five large US universal banking firms and Street expectations for the European firms and our independent competitors, we anticipate that our market share of the disclosed advisory revenue pool on a trailing 12-month basis will again increase meaningfully this quarter. We continue to grow share in an environment that is not dominated by large deals, demonstrating the depth and breadth of our capabilities and our relationships. Now, let me now briefly discuss our financial performance. First quarter net revenues were $384.7 million, up 50% versus the same period last year, marking the best first quarter in our history and our third strongest quarter ever. Net income was $83.6 million for the quarter and earnings per share was $1.61, up 155% and 156% respectively year-over-year. These results reflect a 10.9% provision for income taxes in the first quarter as we implemented required changes to the accounting for stock compensation and the associated income taxes in the quarter. Net income and earnings per share, excluding the effects of the change in accounting for income taxes are $58.3 million and $1.13 a share, a 78% and 79% year-over-year increase respectively. Bob will discuss this accounting change in more detail in his remarks. Our compensation ratio was 59% for the quarter, which reflects our current full-year expectations. We increased the compensation ratio from last year's level to reflect the actual and expected cost of new hires in 2017, including costs associated with SMBs recruited in 2016. As we have said consistently, if we have the opportunity to hire exceptional talent, we will seize it despite the near-term negative effect on our compensation ratio and our operating margins as we believe that these investment in talent increase the intermediate and long-term value of the company. The higher compensation ratio also reflects expectations of a higher compensation ratio in our equities business. Non-compensation costs were $61.3 million or 15.9% of revenues, down 1% versus the prior quarter and up 13% year-over-year. The year-over-year increase reflects headcount additions, principally within our global advisory teams. Operating margins for the quarter were 25.1%. Let me conclude my initial remarks by commenting briefly on our equities business. Industry pressures continue to weigh on that business and we now believe that the lower volatility and the ongoing shift from active to passive managers, along with other pressures, will increase the challenge to deliver additional earnings and margin growth over the roughly three-year remainder of the performance period. Consequently, we have reduced our expectations for earnings and margins from the business and the expected consideration to be paid for the ISI acquisition. Keep in mind that 68% of the consideration in that transaction was earn-out. The reduction in earnings and expected share account offset each other and have a nominal effect on our EPS in the quarter. The deal structure was designed to address the uncertainty about the future operating performance of the business. In other words, the transaction structure is working exactly as we had hoped. Bob will discuss these changes further in his remarks. Let me conclude by saying unequivocally that we remain strongly committed to the equities business as we view it a powerful differentiating factor versus our independent firm competitors. We are confident that our equities business continues to impact positively our overall investment banking franchise both from a revenue growth and recruiting perspective. Let me now turn the call over to John to discuss our Investment Banking business.

Good morning. Our Investment Banking business had a record first quarter. Net revenues were $366.5 million for the quarter, a 55% increase over the same period last year. The operating contribution was $91.6 million for the quarter, an increase of 88% over the same period last year, driving meaningfully higher operating margins of 25% in the quarter, up from 20.5% a year ago. Advisory fees were $305.5 million in the quarter, the second highest in our history and 74% higher than a year ago. For the quarter, Advisory revenues include 53 fees equal to or greater than $1 million in comparison with 41 such fees in Q1 2016. The number of fee-paying client transactions in Q1 2017 was 163 compared to 173 in Q1 2016. The composition of advisory revenues for the quarter reflected strong contributions from multiple sectors, particularly energy, TMT, healthcare and financial services. We are also experiencing continued strength in energy-related restructuring activity and saw strong activity in capital advisory. We remain active globally, earning 33% of our advisory fees in the last 12 months from clients located outside the United States. We continue to expand our global reach to important strategic markets. As we announced in a press release last week, Waleed El-Amir joined us as a senior advisor, working with us to expand our footprint in the Middle East and Africa from our newly established office in Dubai. Productivity of our advisory senior managing directors was $15.3 million globally for the 12 months ended March 31, 2017, a 27% improvement from the $12.1 million from the same period last year. For ECM, more accommodating markets helped continue the momentum that began to see in the back half of last year, with underwriting revenues of $10 million for the quarter. Our team is executing our strategy, participating in a meaningful way in a high-profile transaction, including securing bookrunner mandates on several leading transactions. Looking back at the last few quarters, we've seen good diversity of activity in important sectors, such as healthcare, TMT and energy. As Ralph highlighted, equities experienced a more challenging start to the year than we had anticipated. US equity market volumes were down 17% year-over-year and this environment of low volatility created headwinds that we believe could be sustained. Evercore ISI contributed net revenues of $54.5 million in the quarter, including $5 million attributable to underwriting. Secondary revenues of $49.5 million were down 13% versus last year, less than the decline in the market volumes. Overall, the business produced operating margins of 15.2% in the quarter. In a more granular assessment, we continue to advise on many of the leading transactions in the marketplace for the first quarter, including the Conflicts Committee of Williams Partners L.P. regarding its $11.4 billion simplification transaction with The Williams Companies; Takeda Pharmaceutical Company Limited on its $5.2 billion acquisition of ARIAD Pharmaceuticals, Inc.; Misys on its CAD 4.8 billion acquisition of DH Corp; the Special Committee of the Board of Fortress Investment Group on its $3.3 billion sale to SoftBank Group Corp.; Old Mutual plc on the sale of a 24.95% stake in OM Asset Management plc to HNA Capital US; Attarat Power Company in the $2.1 billion financing of its oil shale power project in Jordan. We also serve as the bookrunner on leading transactions including the $1.3 billion follow-on offering for Athene Holdings. Our backlogs remain strong, sustaining our momentum. The merging market remains healthy. Announced volume increased 12% year-on-year globally, principally driven by a significant increase in the volume of transactions in the $1 billion to $5 billion range. The announced volume of transactions greater than $5 billion declined 2% year-over-year in the first quarter. In the US, M&A volumes in the quarter increased 4% as a 41% increase in the dollar volume of transaction smaller than $5 billion offset a 42% decline in the volume of transactions greater than $5 billion. Looking at number of announced transactions in the US, the number of announced transactions was up 20% year-over-year. Globally, the number of transactions was down 9% as the increase in transaction announcements in the US was offset by greater declines in Europe and Asia. In terms of outlook for M&A in 2017, we see the core elements that drive healthy levels of M&A volume are still in place, namely historically low interest rates, high equity prices, abundant credit availability, and strong business confidence. We ended Q1 with a healthy number of deal announcements. And as we move into the second quarter of 2017, we are optimistic about the M&A landscape. We continue to closely monitor political, geopolitical and fiscal headwinds that could impact the M&A environment. As you are aware, potential changes in Europe, Brexit and healthcare and tax policy in the US could impact M&A environment, frankly, either positive or negative in the future. As we stated last quarter, these potential sources of uncertainty have not meaningfully impacted the intensity of the dialogue which we are having with our clients to date. Now, let me turn back to Ralph to talk about our Investment Management business.

Thank you, John. Investment Management reported net revenues and operating income of $18.2 million and $4.9 million for the quarter. These results predominantly reflect the contributions from our Wealth Management business in the US and money market investment management business in Mexico as well as contributions from Evercore Trust Company. Assets under management from consolidated businesses increased to $8.4 billion in the first quarter of 2017, an increase of 6% from the end of 2016, driven primarily by an increase in assets under management at Evercore Wealth Management to $6.8 billion. As we have said previously, in Investment Management we continue to focus on our wealth management and trust business and our money management in Mexico. We do not anticipate making material additional capital commitments to these businesses other than to the continued growth of our wealth management business. Bob will provide further comments now on our GAAP results, our non-compensation costs and other financial matters. Bob?

Thank you, Ralph. Let’s kickoff with our GAAP results. Net revenue on a GAAP basis of $387 million were a record for a first quarter just as they were record on adjusted basis. Net income attributable to Evercore Partners, Inc. was $80.8 million for the quarter, also a record, benefiting from the change in reporting from income taxes and the reversal of expense related to the ISI acquisition LP interests. Consistent with prior periods, our adjusted results exclude certain items that are directly related to our acquisitions and dispositions, particularly costs related to our equities business. Most significantly, we adjust for costs associated with divesting of LP unites and interests granted in conjunction with the ISI acquisition. For the quarter, we expensed $4.8 million related to the Class E LP units and reversed $26.2 million of expense related to the Class G and H LP interests. The expense reversal followed a review of the outlook for the Evercore ISI business where we’ve concluded that it would be appropriate to lower the level of earnings and margins that we consider probable of achievement in the future. We expensed $31.7 million related to these equity units and interests in the same period last year. As Ralph noted, our adjusted presentation includes all of the shares we expect to issue for the equities business in the EPS denominator. Based on our current expectations, we have lowered the number of shares we expect to issue to approximately 5.4 million shares. For consistency with GAAP, we reflected this change as of January 1, 2017. We will continue to evaluate this expectation quarterly. Turning further to equities, the adjusted operating margin for that business, which governs the ultimate payout of the G and H units, was 8% for the first three months of the year. As a reminder, the payout for the final tranche of the G interests requires an adjusted operating margin for the full year of 2017 of 16%. Moving on to non-comp costs. Firm-wide operating costs per employee were 39,000 for the quarter, down 1% from last quarter and 6% higher year-over-year. The increase was a result of the growth in year-over-year non-compensation costs that are less directly correlated with headcount growth, including occupancy, professional fees and execution costs in the equities business. The expensed cost per head for the past two quarters is broadly consistent with our operating expectations. Providing a bit more detail on taxes, our adjusted tax rate for the quarter was 10.9% as compared to 38% in the prior quarter and 37.5% in the same period last year. This decrease is primarily driven by the change in accounting standard related to share-based comp. The tax benefit reflects the tax deduction based on an average share price at vesting of $78.83 versus an average share price at grant of $49.56, adding approximately $0.48 to adjust earnings per share. The tax benefit is tied to the vesting of awards and will therefore always have the greatest potential impact in the first quarter of each year when the majority of our issues vest. For quarters without meaningful vesting of compensation equity, the tax rate is expected to be comparable to previous relevant quarter. Our share count for the first quarter for adjusted earnings per share was 52 million shares, slightly lower in comparison with the prior quarter due principally to the change in expectations for ISI, offset by increases associated with new hires from 2016, higher shares resulting from the higher share price and a small increase relating to the change in accounting addressed earlier. On a GAAP basis, the share count was 45.9 million shares. In the first quarter, we repurchased 1.1 million shares at an average price of $77.99, reducing the dilution of shares granted to employees and new hires in the year and the shares associated with the ISI acquisition. We awarded 2.5 million shares in conjunction with annual [indiscernible] awards and remain committed to more than offsetting the dilution associated with annual compensation awards. Finally, our cash position remains strong as we hold $414 million of cash and marketable securities at the end of the quarter, with current assets exceeding current liabilities by approximately $437 million. With that, operator, can we open the lines for questions please.

Thank you, sir. [Operator Instructions] Our first question is from the line of Brennan Hawken with UBS. Your line is open, sir.

Good morning. Thanks for taking the question. I just would like to ask something on the reversal and maybe some of the mechanics in comp. So, it seems as though what you’re saying is, there was a $26.2 million reversal out of comp based on Class G and H, which I get and I totally appreciate the comments from Ralph about how you guys structured the deal and why you guys wanted to go this route. But is it correct to say that, without the reversal then, the comp ratio would've been north of 65% because if I add that to the comp ratio, it looks like it really would've been really high. So, I guess I'm just a little confused, could you maybe help me understand that?

Sure, Brennan. It’s Bob. Let me take that. The reversal that I described is relevant to our GAAP results. Your question – let me remind all on the call that the accounting that we adopted on an adjusted basis was to eliminate the GAAP expense associated with the vesting of unvested E, G and H units and interests, but also on day one to include all of the shares that we expected to be issued as consideration. So, on a GAAP basis, the expense that we recorded is lower than it had been because we were accruing at a higher rate. That adjustment that you’re questioning only impacts the GAAP numbers. It’s not in the adjusted. So, it wouldn't cause that 59% comp ratio that Ralph talked about [indiscernible].

Got it. Okay, perfect. Thanks a lot. That really helps a lot. So, next question. I appreciate how you’ve reassessed things and adjust the fully diluted accordingly. I know in the past, there's been maybe minimal discussion on the ranges for the H shares, but given that there are a little bit of further questions about the outlook there, I believe the upper end of that three-year average is 17% margin, with an operating profit target as well – I want to say it’s like $48 million on the maximum side. Can you give us a sense about where the minimum threshold would be, just so we can start to figure out how to frame that?

Let me make it perhaps easier for you than sort of diving into those deal mechanics that Rob and I described endlessly two-plus years ago. If you look at what we've expensed for the Hs to date, this will be in our 10-Q, but you could construct it from the information we’ve given you today. It would be about $56 million, Brennan. The total maximum expense, okay – and again, this has always been in our 10-Q. It’s about $236 million. If you do the arithmetic and the extrapolation, what that will indicate to you is a current expectation of about half.

Okay.

Of the H interest.

Got it. Half of the – as I recall, the Hs were like what $4.4 million in total, right?

That’s correct.

Perfect, okay.

Another way to look at this, Brennan, our best judgment is 5.4 million shares at the moment. And I think Bob suggested that, by virtue of the likely outcome in terms of the adjusted margins, secondary revenues only, keep in mind, that the Gs will not – the last tranche of Gs would not be hit, which is roughly, as I recall, like 360,000 shares or something like that. The rest of the shares are all in the Hs.

Right, right. Because the last tranche of G was like 2017.

Yeah.

Perfect, okay. Okay. Get that. Thanks for the patience with the deal mechanics. It’s just a little chunky and a little confusing. So much appreciated that. Taking a step back, Ralph, I know you stated your commitment to the business overall and how important it is strategically, how it fits in. So, can you tell us about – I believe that there was some turnover at the senior level in the equities business recently. Can you tell us about changes that you've been making as far as management goes and steps that you will be taking to ensure that you retain the very high quality research talent that you have in the ISI business?

First of all, the reason I make those very strong statements about its strategic importance is that we are fundamentally an intellectual capital talent business. And the Evercore ISI equities business adds materially to the intellectual capital and talent of Evercore. And just to refresh everybody's memory, when we did this transaction, we said that we expected to achieve three things. One that we would run a profitable equities business. We said not as profitable, we thought, from a margin point of view as our advisory business, but we did believe that that business could be run profitably and we are doing that. Second that it would add to our underwriting revenues, which it clearly is using and we’re starting to see even stronger results in that regard. I think this week we’re actually involved in six equity offerings, week-to-date. And third that it would add importantly to the rate of growth in our advisory business by making us a more attractive home for advisory bankers, particularly in sectors where equities are very important to their clients, such as biotech, such as healthcare, such as obviously technology, energy etc. And all three of those things have happened, which is why I say unequivocally that we believe this is part of the core strategic capabilities of Evercore and a real differentiator versus every single one of the other independent firms. And when we did put the two businesses together, keep in mind, we had an equity business, a small one, when we bought ISI. We took the leadership from both businesses and made an executive committee, and we did that to have some period of time of stability, so that there would be continuity from both the Evercore side and the ISI side. We’re now two years, a little over two years into the transaction and it gives us the opportunity to rationalize the management a little bit and perhaps bring in some new blood for leadership, to take us to the next level. And we are – I don’t want to be too complementary to all the analysts on the phone, but we’re extraordinarily focused on the very high quality team and the accord – and the enormous respect that our research team is accorded and I assure you that retention of that team is very much on our mind.

Okay, sounds good. I have a bunch more questions. But you know what? I’m going to re-queue and let others get a shot here. Thanks a lot.

Thanks, Brennan.

Our next question is from the line of Devin Ryan with JMP securities. Your line is open.

Hey, thanks. Good morning, everyone.

Good morning, Devin.

So, maybe a first one here on the backlog. I know that trying to take a snapshot at any point in time could be pretty misleading and we, obviously, only have limited information from the outside. But I do think there's a perception that maybe backlog for the industry have been shrinking a bit. If you just look at some of the data sources that I think everyone tracks, that’s kind of been the case. So, I’m just trying to reconcile that based on what sounds like a constructive outlook from here, from you guys. And I guess really the conclusion that the backlog interpretation is just timing. You had a very strong first quarter of closings or does it maybe sound like the high-level data that I think we’re all looking at just is wrong?

I think the visible backlog, Devin, whether it’s for Evercore or the industry sort of always dissipates some in the first quarter. I think if what you are seeing externally were the read through to the business we’re managing, John wouldn't have said what he said about our backlogs remaining quite strong. Speaking just for our firm, if you look at the level of activity of announced transactions, even carrying into April, it's been quite broad-based We’ve been in multiple sectors, multiple transactions. So, I would lean more towards John’s comments that our backlogs remain strong than to your logic. But you all know how I feel about your logic.

And, Devin, I would just add one thing, which I discussed I think on our last call. And that is that the performance of Evercore, obviously, as all of these questions – as some of these questions imply is affected by the overall market – our M&A activity. But our performance, very importantly, is also affected by our market share. And I think in the last quarterly earnings, I reviewed how during the four-year period, from 2010 to 2013, when M&A activity was flat as a pancake essentially, our Advisory revenues grew during that period every single year in double-digits. And this quarter, I think we’re going to find that total reported Advisory revenues from the publicly-traded firms will be flat-ish, maybe down a little bit. And, obviously, you can see what’s happened with respect to Evercore. So, we should never forget that we, at least over the last six or seven years, have been beneficiaries of very real gains in market share, and that's certainly been the case this first quarter as well.

Absolutely. No, appreciate that color. Just wanted to try to dig in a little bit deeper. So, that’s very helpful. Maybe a follow-up here. Just on kind of the growth of the firm – and there's been a lot of press around firms bulking up in the Middle East. Obviously, Evercore just opened a Dubai office this quarter. So, I’m just curious how big of an opportunity the Middle East developing into. And then, are there any other emerging M&A markets that are maybe becoming a bigger opportunity than you thought a couple of years ago where it would make sense to actually establish more of a presence?

Yeah. You faded out a little bit. But, first of all, I’m not sure I’d use the term bulking up. I think we’re establishing an office there because we do see opportunities there, both in terms of M&A advisory, capital markets advisory, importantly, and also there are, obviously, some of the largest investment pools in the world and the sovereign wealth funds there. And they have increasingly evolved from investment pools that have invested in funds to investment pools that are investing in individual assets. And as a consequence, they’re actually starting to look a little bit more like PE firms than pension funds, for example. So, that's what drives the opening of an office there, an office that we think will be sized to be consistent with the opportunities that we’ll see there.

In terms of other areas that we’re looking at, we see, for Evercore, opportunities in both Asia and Europe. As you saw, we added Fukuda san in Japan and we actually see, despite the fact that those markets may be showing some weakness right now in the first quarter, volumes. We actually see opportunity for us and our brand in both Asia and Europe. And so, from our perspective, we’re watching those markets and we are going to continue to very carefully add resources there because we think, for Evercore, there are real opportunities in both of those markets.

Okay, terrific. And thanks for taking the questions and congratulations on the strong start to the year.

Thank you, Devin.

Thank you.

Our next question is from the line of Ann Dai with KBW. Your line is open.

Hi. Good morning. Thanks. I was hoping to focus in on the equities business a little bit more. So, just thinking about first quarter and knowing that this quarter and 1Q 2016 are not necessarily apples to apples given the market volatility that we saw last year, I was hoping you could just give us some thoughts on how you think this quarter’s results and the broader context of an annual run rate. So, internally, if you’re thinking about what’s realistic for this year, is it the kind of thing where you’re saying, all right, given fee pressures and with MiFID, if we can be a couple of percent down, that would be a good year?

Well, we never project forward. So, I'm more than willing to talk about this quarter. And you're absolutely correct that there was a lot of volatility in the equity markets in the first quarter of last year. There was very little, if any, in the first quarter this year. And that led to, as I think John indicated, a 17% decline in trading volume in the equity markets in the first quarter. Our secondary revenues were down less than that. So, just as we are an advisory, we’re actually gaining market share. What does that mean for the second quarter and the third quarter and the fourth quarter? I don't think anybody could predict that. No one – volatility has been an absolute low over the last quarter or two. One would normally say that won’t stay there forever, but predicting volatility is like predicting the direction of the market or the direction of currencies and the direction of commodities. There are lots of opinions, but no one knows the answer.

Okay. I appreciate the color. You mentioned that there was a higher comp in equities business this quarter. So, I’m just wondering if that is fully a function of lower revenues or if it reflects some amount of higher comp, maybe because our net [ph] assumptions are coming down and you’re having to pay people for more.

It’s principally a reflection of lower revenues.

Okay, great. I’ll hop back in the queue. Thank you.

Our next line is from Mike Needham with Bank of America Merrill Lynch. Your line is open.

Hi, good morning. So, first, I think there's a sense that, as regulators are replaced by the new administration, there could be some regulatory easing in certain sectors. I’m just wondering, are you seeing initial interest from clients in highly regulated sectors becoming more active in M&A dialogue?

We’re seeing the dialogue picking up, but we don't know whether that will lead to activities in those sectors that are above what we thought they would be when we saw things on a flat line. But there's no question that, generally, dialogue levels are very high. And in those sectors which have been highly regulated, there is a lot of discussion about what is going to be possible. But I also think that, for the most part, executive teams are saying we need to see a little bit more as to where things are going because it's still a little bit cloudy. So, I guess the answer to your question is, yes, we do see the dialogues, very robust in those areas. We're not sure, though, that that’s going to lead to much yet because we have to see where it all plays out.

Okay, thanks. And then, as a follow-up, in the energy sector, how much restructuring work do you think is left? Are you seeing more asset sales, mergers, recapitalization work happening? And if you are, can you help us try to size that opportunity versus restructuring opportunity? Thanks.

I think we said on this call a year ago – we were asked by someone, were we worried about our outlook for Advisory revenues because energy activity was clearly going to be down in 2016. And I think we responded, at that time, that we didn't necessarily agree with that statement and that we felt that there would be, in 2016, quite a bit of opportunity in the restructuring area, and that that would be followed in 2017 and 2018 by re-equification and by M&A activity. And I would say everything that we have seen up to now would suggest that at least that prognostication has turned out to be pretty on the mark.

Got it. Makes sense. Thank you.

Our next question is from the line of Conor Fitzgerald with Goldman Sachs. Your line is open.

Hi, good morning. Just maybe a two-part question on tax reform. One on the near term and one on the longer term. Just trying to get a sense, if you think, in the near term, there could be a little bit of a headwind on M&A as some of your clients wait until they have more clarity on how the tax code could impact them for executing on an M&A transaction? And then, I just wanted to get kind of updated thoughts on longer-term, what you thought a lower corporate tax rate could mean for M&A activity overall.

Well, it’s hard to really predict. I would say that there is no question that, right now, some of the very large transactions, there's a lot of discussion about what is the impact on tax. Clearly, there is a great deal of money that is oversees that its taxes somehow are advantageous if that money may be brought back and become more usable in M&A type things or at least more strategy. So, I would say that, generally, the discussions go something like this. People looking at there – are looking at strategies. You'll see what I would call smaller transactions. There is no hesitation. People are pulling the trigger. And you saw that in the volumes of smaller deals that we talked about previously in our discussion earlier today. I think large transactions will be influenced somewhat by tax policy. And I think that we’re seeing clarifying right now it’s just a question of how quickly it will clarify now. But there will be some transactions, big transactions that go forward. But your question was, do we see a shading? Will there be some – are some people waiting and are some people going to accelerate if the taxes are right? And I’d say, to answer both questions, probably there are management teams that are going to wait and see. And to the extent it’s advantageous to use cash, I think you'll see that to actually help catalyze more merger activity.

That’s very helpful color. Thank you. And then just a question on MiFID II. I wanted to get your sense of how you thought that rule can impact your equity business and just wondering how active your dialogue has been with your buyside counterpoints at this point in time? And then just from a broad perspective, the rule technically only impacts Europe and your business skews more towards the US. But wondering if we should think about the impact of the rule having a more holistic impact on kind of your business globally or limited to Europe?

Okay. Let me take that. First of all, the dialogue with clients is, obviously, very intense around this issue since it will be implemented January 1 of next year. Second of all, while obviously, it applies only to Europe, we do believe that there will be spillover into the US, particularly as it affects some of the larger integrated global equity investing firms. And then finally, we’ll find out next year the ultimate effect. I think there's pretty broad consensus that MiFID II will have at least two effects. One is that it's likely to shrink a little bit the fee pool for research and the market share of those who have truly distinguished high-quality research is going to go up. The latter we clearly benefit from. The former, all firms in our business will be affected by. And how those two shake out, I think, will take a few quarters to sort through.

That’s helpful. Appreciate that. And then a cleanup on the compensation expense. In your release, I think you mentioned the costs associated with new senior hires that you talked about, but you also mentioned compensating employees for their performance, consistent with market rates. Didn't want to read too much into, but should I interpret that as the market rate for the same performance has moved higher year-over-year.

Look, the vast majority of this is driven by our expectations of the impact of hires that we make this year, the seniority of those hires, and spillover because the comp effect of new hires tends to occur in two years. So, it’s a combination of a little bit of left over from last year's hires and its effect on this year and the hires that we’ve made and those that we anticipate making during the course of this year. And then secondarily, a minor effect is the impact of a slightly higher comp ratio in the equities business, which, by the way, is one-fifth the size of our Advisory business. So, it' doesn’t have nearly as much effect on the firm’s comp ratio in total. But we’re being cautious here because we do see some real hiring opportunities. And as we've always said in the past, if we have those opportunities, because they’re unquestionably accretive to the intermediate to longer-term value of the firm, we’re going to make some modest investments in order to seize them.

Very helpful. Thanks for taking my questions.

Thank you. And our next question is from Steven Chubak with Nomura Instinet. Your line is open.

Hi, good morning. So, I want to kick things off with a question on the ECM outlook. You noted that the equities business is certainly facing some headwinds on the secondary side. But capital raising and IPOs actually saw a meaningful acceleration not just for you guys year-on-year, but also the broader industry. And thinking a couple of years back where you talked about being able to generate $75 million to maybe even $100 million revenue run rate within ECM, more in line with some of your SMB [ph] peers. And over the last 12 months, and even just annualizing the latest quarter to just around $40 million to $45 million, and you’ve been running at that level for some time. And just want to get a sense as to whether you’re still committed to hitting those targets and maybe what's the path to closing that gap?

Yeah. I think when we did the transaction, I said that I felt that it’s not unreasonable for us assume that we would have a business of that size and scale. I still believe that. I also said at that time, I just couldn't tell you in which year we might get there. I think it's probably taken a little bit longer than we had hoped. As John said, the backlogs that we have in that business are encouraging and I think our activity quarter-to-date is encouraging and we, obviously, don't make forward-looking statements. But we’re encouraged by the progress that we’re making.

Got it. And just one more for me on the restructuring business. Recognizing the timing, it’s always difficult to predict in terms of like when we could see some of the energy activity dissipate. There's been a lot of discussion around the consumer retail sector and some of the headwinds that those businesses are currently facing. Do you know if you can give us any insight into how you’re thinking about that restructuring opportunity going forward? They don't seem as involved, but at the same time there are significant challenges that the sector is facing.

I’m sorry. This is at retail?

Yeah. Consumer – that’s right.

Yeah. I would say, look, one of the challenges in restructuring in retail is that a larger percentage of the failed situations in that industry wind up as liquidations rather than restructurings. And we’re not in the liquidation business. So, while there is clearly stress in that industry, you have to be a fair amount more selective as to which companies that are under stress actually have a viable post-stress opportunity. And that is not all of them. And so, that is the reason that while a comparable amount of stress might not produce a comparable amount of restructuring activity.

Very helpful. Thanks for taking my questions.

There appear to be no questions at this time. I would now like to turn the floor to Ralph Schlosstein for closing remarks.

Thank you very much, everyone, for your time and attention and look forward to talking to you next quarter.