Good morning, and welcome to the Perella Weinberg Partners Second Quarter 2022 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Taylor Reinhardt, Head of Investor Relations. You may begin.

Thank you, operator, and welcome to our second quarter 2022 earnings call. Joining me today are Peter Weinberg, Chief Executive Officer; and Gary Barancik, Chief Financial Officer. A replay of this call will be available through the Investors page of the company's website approximately 2 hours following the conclusion of this live broadcast through August 11, 2021. For those of you who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, August 4, 2022, and have not been updated subsequent to the initial earnings call. Before we begin, I'd like to note that this call may contain forward-looking statements, including PWP'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 PWP'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, there 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. PWP has reconciled these items to the most comparable GAAP measures in the press release filed with today's Form 8-K, which can be found on the company's website. I will now turn the call over to Peter Weinberg to discuss our results.

Thank you, Taylor. Good morning, and thank you all for joining us on our second quarter 2022 earnings call. Before I give some color on our financial performance, on the occasion of being public for just over a year, I wanted to put into context our aspiration and journey to become the leading global independent advisory firm. When we first approached the public market investors in the fall of 2020, we articulated a very precise vision for our firm to grow our leading independent advisory franchise by broadening and deepening client relationships by expanding the suite of our advisory services and by adding best-in-class talent to the team. We saw an enormous market opportunity, and we felt the firm was exceptionally well positioned to capitalize upon it. Our pursuit of that goal would remain undaunted in booming operating environments and in stressed economic times. While we've tested the bookends of those extremes in our public life. In 2021, global M&A volume was at a record $5.8 trillion. Our revenues were up over 50%, and our earnings were up over 4x the prior period. In 2022, we're facing very stressed macroeconomic and geopolitical conditions without any clear indication of improvement in the near term. Our mindset in this volatile and challenging environment is that the opportunity for our firm is greater even than it would have been a more stable and robust economic environments. We are focused on leaning into this market, investing and capitalizing intelligently so that when the cloud is eventually part, our positioning has only strengthened. We continue to attract great talent to the firm from universities all the way up to partner. Particularly with senior bankers, we're finding our access and yield has never been higher. Since 2020, we've added 16 advisory partners. In 2022, so far,…

Thank you, Peter. As Peter mentioned, revenues for the second quarter totaled $151 million, a decrease of 41% from the prior year period. Our first half revenues were $303 million, a decrease of 29% from the prior year. Our prior period results presented us with challenging comparisons with record-setting performance in the second quarter of 2021, driven by an elevated level of large fee transactions. The year-over-year decline for both periods was driven by a reduction in activity across the platform, particularly in mergers and acquisition advice relative to record 2021 results. Our second quarter and first half saw fewer advisory transaction completions and a decrease in average fee size for clients. Our second quarter results included a recognized revenue amount of $8 million from a transaction that closed at the start of the third quarter, in line with relevant accounting policies. This compares to $17 million, which was similarly recognized in the prior year period. The first quarter period did not include any transaction fee revenue from closings early in the second quarter of 2022. My following comments will focus on non-GAAP metrics, which we believe are relevant in assessing the financial performance of the business. Our GAAP measures and a reconciliation of GAAP to adjusted results can be found in our earnings press release, which is on our website. On the expense side, in the second quarter, we accrued adjusted compensation expense of 64% of revenues. We'll continue to evaluate the business environment as the year progresses, but I expect that our full year adjusted compensation expense margin will be in line with our prior medium-term guidance of the mid-60s ratio. Our adjusted non-compensation expense was $31 million for the second quarter, up 4% year-over-year, although down 4% quarter-over-quarter and represented 21% of our revenues. We currently expect…

Gary, thank you. I would just conclude by saying that these are tough days for our industry, for our clients and for many people around the world. We believe our business model and our firm will sustain in any economic environment, and we are steadfast in our commitment to provide long-term growth. Operator, we can now open it up for questions.

[Operator Instructions] We'll take our first question from Devin Ryan with JMP Securities.

I appreciate the outlook, particularly for the back half of the year. From the outside what we're tracking, the pipeline looks like hanging in pretty well, maybe even growing a bit, but at the same time, we are hearing from a lot of your peers about the elongation of just timing of deals kind of moving through pipeline and closing. So question is, if you can just touch on how you would actually characterize the pipeline itself. And then interrelated, when you think about the back half outlook, does that imply the elongation theme continues, gets worse? And are there any maybe early green shoots that the market could be moving into a better balance as well?

So I would say from an overall perspective, that I am enthusiastic about our sector and our firm in the intermediate and longer term, but really remain cautious in the short term. We are still not out of the woods yet by any means with respect to this environment. As you all know well, we have higher cost of capital now in the system, both on the credit side and the equity side. Volatility, uncertainty has shaken confidence really all caused by macroeconomic factors. Having said that, I do feel there are some positives. As you rightly point out, our pipeline is only slightly below where it was last year. Our backlog is materially lower. And that really encapsulates the environment we're in to the extent that we're all very busy, but it takes longer and it's tougher to close transactions. I would also add that the intent of our clients has not changed. In other words, a good idea last year remains a good idea today. It just may be more complex to execute. And the other force that we're seeing is -- and I've seen this in many other crises that I've been in over the years -- is that activity is really being driven by the very strong who feel that they can capitalize upon their strength to achieve certain strategic objectives or the very weak who were forced into executing transactions really as a matter of survival. So that's what we see for the rest of the year.

And then maybe just one for Gary on share repurchases. I think people are very pleased to see how aggressive the company has been leading in particularly in this environment and share price. If the stock remains I'll call it in the similar ballpark, could we see a similar pace to the first half of the year continue on repurchases? And just how are you thinking about capacity beyond this first $100 million, just considering some of the other moving parts you've highlighted like the space build-out. The flip side is you're still generating very strong cash flow even in this environment.

Our commitment to returning excess capital to shareholders over the long term is obviously core to our strategy. That said, we really don't comment on the specific cadence of the anticipated repurchases going forward or potential changes that our Board may want to approve in terms of future increases to the current program. I will say and kind of reiterate that the environment, as you mentioned, was quite attractive for share repurchases in the quarter, not only due to where the stock price was that we think is a very attractive purchase point. But also just that we had relatively high trading volume in the quarter, which we think was largely driven by folks who were -- some of our shareholders, particularly hedge fund shareholders who were exiting. And so that provided an opportunity in the quarter as well. We have repurchased, as Peter mentioned, about 15% of our Class A common. So we're kind of mindful of liquidity as well. And so those are all considerations that as we think about the future, we'll keep in mind.

We'll take our next question from Richard Ramsden with Goldman Sachs.

So Peter, maybe you can just talk a little bit about the relative engagement from corporates versus financial sponsors and how that's evolved over the course of the year and what you're expecting in the second half. And I'm particularly interested in how you're thinking about the change in financing conditions for those two client subsegments and how you think that's going to impact activity as you think about the next six months?

So with respect to sponsors, let's not forget that there's $1.5 billion to $2 trillion of dry powder out there, which at the moment is very much on the sidelines, but it's certainly not going away. I had actually felt a couple of months ago that the decrease in valuations would outweigh the increase in the cost of credit and that activity would result. That really has not been the case yet with respect to initiation. There's a lot -- there's still a lot of activity in the sponsor ecosystem, but it's not as much on new deals. We believe that the equilibrium will, at some point, reach the marketplace and transactions will occur. We're still in that uncomfortable phase of it's difficult to achieve price discovery. The financing conditions are -- there's enormous financing capacity in the market. It's just -- and right now, it has a lower risk tolerance. So we think that, that market is kind of a coiled spring, but it's unclear when it will kind of take effect. And that's our experience in the market so far as it relates to sponsors.

Okay. That's helpful. And then maybe as a follow-up, are the more difficult financing conditions helping the capital advisory business? Maybe you could talk a little bit about the dynamics within that business? And is that -- is the growth rate in that business different to what you would have thought three or six months ago?

Yes. That theme that you identify is absolutely evident in our business. I mean we really look at our debt advisory and capital solutions business sort of under one umbrella. And whether that's in the restructuring space or advising companies on issuing credit or advising on equity. And so it is more active now because that topic is very much a strategic topic with almost all our clients right now. And that is different than it was, I would say, six months ago and has indeed increased the dialogue on that subject with our clients.

We'll take our next question from Steven Chubak with Wolfe Research.

Maybe a somewhat more nuanced question just on the advisory outlook by geography. Certainly, especially in light of this morning's announcement of the U.K., reinforcing just elevated recession risk. It feels like that's a broader concern as it relates to Europe. You do have a pretty strong franchise in the region. I was hoping you could just provide some context as to how you're thinking about the advisory outlook across the different geographies.

Sure. So Europe right now is really kind of a tale of two cities. On one hand, it's a perfect storm. The war in Ukraine, enormous disruption in the energy complex, very high stress and sovereign budgets and sovereign debt levels and add to that all the things that we're dealing with here in terms of the recession, inflation, supply chains, everything else. So on one hand, it's kind of a perfect storm over there. On the other hand, and this has been a very interesting development for us, which is that there are areas of urgency which propel activity in Europe. You'll notice that the numbers -- I don't want to over-interpret July, but the July M&A numbers in the whole market in Europe are actually quite a bit more attractive than the U.S. And we believe that's due to the areas of urgency, which are propelling activity. For example, energy transition, whether it's renewables or energy tech or hydrogen or electronic or EV infrastructure that is propelling activity. Also, large companies looking to raise capital who may not be able to raise it in the financial markets are selling assets often in the infrastructure space. Europe is behind in consolidation, telecom, banks, et cetera. And there's a much higher level of start-ups in fintech and mobility and health care. So it's an interesting market where there are plenty of concerns, as you rightly point out, but there's also another side of the story, and that's keeping us busy over there.

And for my follow-up, Peter, you had mentioned that you're looking to take advantage of some of the recent disruption and investment opportunities that might be emerging. I was hoping you could provide some context as to what level of gross partner adds, we should be contemplating? And whether you can sustain a 64% comp accrual while leaning into some of those investment opportunities given the more challenging revenue backdrop you cited?

Yes. So this year, just to level set, we have either elevated or hired or have agreed to hire eight partners; three are promoted from within the firm and five are either here or have agreed to join. Last year, the apples-to-apples number to 8 was 10%. We elevated three partners internally and hired seven, and we're not finished in the year yet. Of course, we're only in August. We definitely have our eye on a very specific growth plan in the firm. It's the same plan that we articulated when we entered the public market. And we will continue to hire partners. We feel that they are open to conversations almost without exception. And we think there's still an enormous supply of bankers who will enter the independent space, whether it's us or someone else. So that's our strategy is very much to grow through the hiring of partners, and we will continue to do that.

Yes. And Peter, I'd just add on comp margin, as you saw, we've continued to accrue for the year at 64%. That's sort of our best estimate as of today. I think our view for the year is we're still quite comfortable with our medium-term guidance, which is a mid-60s comp ratio. And we're not going to get more specific than that right now, but that's really kind of the state of where we see things today.

We'll take our next question from Michael Brown with KBW.

So Peter, I appreciate the commentary on the restructuring business and the latest trends that you're seeing there and you noted that there's a potential for some pickup in 2023. Can you just talk about the size of that restructuring and debt advisory business either in terms of the revenue contribution or the dedicated partner headcount for that business to try to think about what that potential lift could be next year?

Sure. Well, to answer your specific question, we have seven partners in our restructuring business, and we have a broader set of partners in our overall capital solutions business, which really covers the broad topic of credit advice with respect to our clients. I will just make a comment on the restructuring opportunity and elaborate a bit on what I said a minute ago. Right now, distressed companies are still benefiting from the capital that was available to them last year and before. But the reason that we're positive ultimately on the restructuring opportunity is because right now, the high-yield index is 300-or-so basis points higher than it was. But for even more stressed companies, so say, CCC companies, interest rates are 2x what they were. So that's going to cause a challenge, particularly when you look at maturities coming forward of both high-yield bonds and leveraged loans, which in the next three years is almost $700 billion. And so we feel that our firm is well positioned for that. As I said, it's not going to happen tomorrow because of the capital that was raised last year and before, but we do believe it's coming.

The one thing I might add to that, Peter, is I think our visibility on that isn't tremendous right now. In other words, because a lot of these companies have a little bit of that breathing room that Peter just alluded to, if there's a pretty material improvement in rates and in the environment in the meantime, that obviously could work the other way in terms of resurgence and activity next year. We're in a very volatile environment. And so I think how large a contributor our restructuring ends up being next year is going to be -- obviously, it's going to be very dependent on what happens in the environment in the interim.

I guess if you had to frame it maybe historically, and I understand your business has been evolving quite a lot over the last few years. But if you could frame it historically, I guess, what has been the rough contribution? And then when you're thinking about the restructuring outlook here, is there any additional color on where you're seeing some of that opportunity, I'm sure it's across sectors, but is it potentially going to pick up more in Europe first and then the U.S.? Any view on rest of world here? Just any additional color would be helpful.

So we don't disclose, as you know, the contribution of our restructuring business or our credit advisory business to the total. But what I will say is that if you look at the market and you look at the industries that are most represented in the distressed category. So I believe that approximately half of all CCC credits and leveraged loans trading at less than 80% are in the TMT space, the health care space and the industrial space in that order. And so that's as good a proxy as any as to the areas of activity in the restructuring space going forward.

Maybe just one clarification for Gary. The second half guidance on revenues. Is it fair to expect that that's a bit more fourth quarter weighted just given the seasonality of advisory typically?

I think, look, as you've seen from this recent quarter, the ability to predict revenue timing quarter-to-quarter is just -- is not great. So I'm not going to go out on the limb and tell you what I think the allocation is going to be between Q3 and Q4.

This concludes the Q&A portion of today's call. I would now like to turn the call back over to Peter Weinberg for any additional or closing remarks.

Great. Thanks, operator. Thank you, everybody, for joining the call. We appreciate it. Please feel free to follow up with our team, and we look forward to chatting with you at the next quarter.

This concludes the Perella Weinberg Partners second quarter 2022 earnings call and webcast. You may disconnect your line at this time, and have a wonderful day.