Evercore Inc. (NYSE:EVR) Q3 2022 Earnings Conference Call October 26, 2022 8:00 AM ET
Company Participants
Katy Haber – Head of Investor Relations and ESG
John Weinberg – Chief Executive Officer
Celeste Mellet – Chief Financial Officer
Conference Call Participants
Brendan O’Brien – Wolfe Research, LLC
Richard Ramsden – Goldman Sachs
Brennan Hawken – UBS Group AG
Michael Brown – Keefe, Bruyette & Woods, Inc.
Manan Gosalia – Morgan Stanley
Devin Ryan – JMP Securities
Operator
Good day, and welcome to the Evercore Third Quarter 2022 Earnings Conference Call. Today’s call is scheduled to last about 1 hour, including remarks by Evercore management, and the question-and-answer session. [Operator Instructions]
I will now turn the call over to Katy Haber, Managing Director of Investor Relations and ESG at Evercore. Please go ahead.
Katy Haber
Great. Thank you, operator. Good morning, and thank you for joining us today for Evercore’s third quarter 2022 financial results conference call. I’m Katy Haber, Evercore’s Head of Investor Relations and ESG. Joining me on the call today is John Weinberg, our Chairman and CEO; and Celeste Mellet, our CFO. After our prepared remarks, we’ll open up the call for questions.
Earlier today we issued a press release announcing Evercore’s third quarter 2022 financial results. Our discussion of our results today is complementary to the press release, which is available on our website at evercore.com. This conference call is being webcast live in the For Investors section of our website and an archive of it will be available for 30 days, beginning approximately 1 hour after the conclusion of this call.
During the course of this conference call, we may make a number of forward-looking statements. Any forward-looking statements that we make are subject to various risks and uncertainties and there are important factors that could cause 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 SEC, including our Annual Report on Form 10-K, quarterly reports on Form 10-Q, and current reports 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. For detailed disclosures of these measures and the GAAP reconciliations, you should refer to the financial data contained within our press release, which is posted on our website. We continue to believe that it is important to evaluate Evercore’s performance on an annual basis. As we have noted previously, our results for any particular quarter are influenced by the timing of transaction closings.
I will now turn the call over to John.
John Weinberg
Thank you, Katy, and good morning, everybody. Before I review our results, I’d like to share the news that Celeste will be leaving Evercore in February to pursue an entirely different area of finance. She has been approached by a large private, international alternative asset manager, and she has decided to accept a position with her. We’ve all been fortunate to have worked closely with Celeste and we wish her well on this next step in her career. We will commence a formal search process to identify her replacement and Celeste will stay on with us into February to help support us with this transition.
Now, let me talk about our quarter. Evercore performed well in an increasingly challenging environment. As we actively manage monitor the current macroeconomic backdrop, we see continued uncertainty looking forward. However, we also see tremendous opportunities for our business stemming from these inherent cycles. We’ve been through these types of cycles before and we’ve successfully navigated through them.
During the last significant downturn driven by the global financial crisis Evercore emerged stronger. Our competitive positioning and strategic focus allowed us to hire exceptional talent and strengthen our business, which was evidenced in the growth of our market share, and marked a significant step in building our firm to where we are today.
A decade ago, we were much more reliant on traditional M&A. Our M&A and strategic advisory businesses remain strong and very much at the core of what we do. But we have also invested heavily in building capabilities and products beyond mergers. We build scale and restructuring, debt advisory, private capital advisory, fundraising, shareholder advice, capital markets advice and execution for both equity and debt, equity sales and trading and wealth management. In fact, in each of the last 3 years, our M&A businesses accounted for at least our non – two-thirds of our businesses, and our non-M&A businesses accounted for at least one-third of our revenue.
We’ve also fortified our balance sheet and have a strong cash position. This provides us the financial wherewithal to invest in our business and to take advantage of the current hiring environment. As we look forward through the cycle, we are optimistic about the opportunities at hand and remain focused on executing our long-term strategy and investing in our future growth.
Before I review our businesses, I want to speak more about the current environment. While market briefly stabilized in the late summer, volatility returned in September, as the overall economic outlook became more negative, as global economies continue to be faced with high inflation rising interest rates, and energy challenges. These conditions led U.S. equity markets to experience their third consecutive quarter of negative returns.
Debt markets have also been challenged and bank lending has become even more selective as credit and private credit have turned more cautious. All of these factors have led to a sustained slowdown in our merger market.
Turning to backlog based on where it stands today, our backlog remains strong, but there is greater risk to execution. Transaction announcements continue to be slow relative to last year, and the timing of transaction closings remains elongated. Economic stability and market conditions will continue to influence the activity.
As I mentioned earlier, we are committed to our strategy despite the near-term challenges facing the global economy. We continue to invest in industry sector and radiographic [ph] with white space, with a focus on our growth internationally as well as in the United States. We also remain focused on expanding our product capabilities, including equity capital markets, debt advisory and private capital advisory and area in which we continue to see opportunities evolving through the cycle.
Moreover, we continue to believe there is significant upside for us, as we expand our client coverage model. We continue to focus on enhancing our sponsor coverage efforts. We most recently added several senior bankers to our U.S. Financial Sponsors Group, which will strengthen and catalyze our efforts.
I will now review our results in more detail, which underscore the strength and diversity of our model. Evercore generated $583 million in adjusted net revenues, $489 million in adjusted advisory revenues and $2.20 in adjusted earnings per share. On a year-to-date basis, total net revenues were $1.9 billion. These results represent the second best third quarter and 9 months year-to-date on record for our firm.
In advisory, M&A activity levels were lower in the third quarter. That said, year-to-date, the number of announced global transactions for Evercore is down only 8% versus the prior year. That compares favorably to the overall market, which is down more than double that. M&A activity in our U.S. business was down, though, that was partially offset by our team in Europe having a very strong quarter led by the financials, utilities and industrial sectors.
Our activist defense business contains significant activity as the number of activism campaigns in the U.S. is tracking last year’s record levels and European activity remains high. Restructuring activity continues to accelerate as uncertain markets, spiking interest rates and limited access to new capital for highly levered companies increases the need for restructuring advice. We are seeing an uptick in traditional restructuring assignments and continued opportunities in special situations financing, liability management and out-of-court restructuring.
Our private capital businesses which include fundraising, buying and selling, LP and GP stakes and continuation funds have been impacted by the broader environment. That said, our market leading positions in fundraising and continuation funds continue to build momentum and drive new business opportunities. Recently, our Private Funds Group was ranked number 1 in multiple categories in Preqin’s 2022 Service Providers Report for its fundraising efforts in private equity, private debt, and infrastructure space.
Underwriting experienced a slight pickup compared to the prior quarter as seen in both our business and then the overall market. Despite unfavorable market conditions, some issuers in need of capital took advantage of select windows of opportunity. Activity in the third quarter for Evercore was primarily driven by follow-on and at-the-market offerings.
IPO activity remained quite limited as it was the slowest third quarter for IPOs in over a decade. However, some first time issuers came to the market and Evercore serves as a joint bookrunner on Corebridge Financial’s $1.7 billion IPO, which is the largest IPO to date. Healthcare, which is our strongest ECM sector, has been quite active. Year-to-date, we participated in 25% of all market healthcare deals. Our ECM pipeline remains diversified across products and sectors, and we would expect activity pickup as the markets stabilized.
In our equities business, market volatility continues to impact client portfolios and positioning. Our client interactions are on pace to hit record levels, and our research organization continues to perform at the highest level. The team was once again recognized by institutional investor as the top independent research firm for the 9th straight year and ranked number 1 among all firms for analysts on a weighted basis for the very first time. In our Wealth Management business, AUM declined in September with broader market, long-term performance and client retention rates remain strong.
With respect to recruiting talent, we will continue to take advantage of today’s recruiting environment. We’ve hired 7 advisory SMDs year-to-date, all in areas of strategic significance to us, such as TMT tech, debt advisory, ECM in Europe. In addition we have a Senior Advisor who is committed to join us in 2022, who will bring new expertise and capabilities to our technology franchise. We continue to have dialogues with potential candidates and have a strong pipeline of talent heading into next year.
Lastly, as it relates to our capital return strategy, we remain committed to our goal of returning excess cash not invested in the business to our shareholders through dividends and share repurchases. While we returned less capital this quarter, we bought back a significant amount of stock this year, and increased our dividends in the first quarter.
We will continue to opportunistically buyback shares, while maintaining a durable balance sheet. Despite the uncertainty facing the market today, we continue to see strong dialogue with our clients and believe that we are well positioned for the pickup in activity when markets stabilize recover. We remain committed to executing our long-term strategy. And when the market returns we believe, we will emerge even better positioned than where we are today.
Now, let me turn the call over to Celeste.
Celeste Mellet
Thank you, John. Before I get into the numbers I want to express has been a privilege [since I’ve have been] [ph] in Evercore and I’ve worked with all of you. I have great esteem for this incredible firm with mixed feelings that I’m moving on. While I will be here for the next few months to help with the transition, Evercore is in a very strong position financially, and its finance leadership thing is both seasons and extensive, positioning the firm for continued success.
For the third quarter of 2022, net revenues, net income and EPS on a GAAP basis are $577 million, $82 million and $2.03, respectively. My comments from here will focus on non-GAAP metrics, which we believe are useful when evaluating our results. Our standard GAAP reporting and reconciliation of GAAP to adjusted results can be found in our press release, which is on our website.
Third quarter adjusted net revenues of $583 million, down 30% year-over-year. Third quarter adjusted Advisory Fees of $489 million, or 31% lower year-over-year, reflecting a decrease in the number of fees and the size of fees earned as market volumes remains low. Our underwriting business generated revenue of $29 million, down 47% from the year-ago period, reflecting the decline in overall market activity.
Our equities business continue to perform well with Commissions and Related revenue of $49 million, up 5% year-over-year, driven primarily by higher trading volumes and increased revenues from research subscription.
In Wealth Management, adjusted Asset Management and Administration Fees were $17 million, down 14% versus a year-ago primarily driven by market depreciation on AUM. Third quarter adjusted other revenue net was a loss of approximately $1 million reflecting lower performance of our investment funds portfolio, which is used as a hedge for our DCCP [ph] commitment due to overall market decline.
In accordance with relevant accounting principles, our revenue includes approximately $32 million of Advisory Fees, driven primarily from transactions that closed in early October. To compare, we’ve recognized $67 million in the second quarter of 2022 and $93 million in the third quarter of 2021 in accordance with the same accounting principles.
Adjusted net income was $95 million for the quarter, down 49% versus a year-ago period. Adjusted EPS of $2.20 decreased 44% in the prior year. Our third quarter adjusted operating margin was 23.4% versus 31.5% in the third quarter of last year.
Turning to expenses, our adjusted compensation ratio for the third quarter was 61%, unchanged in the second quarter. The compensation ratio is our estimate for the full year as of today, but it’s subject to change depending on how the year ends. As John mentioned, there’s greater risk to execution in today’s environment and visibility is limited. Third quarter adjusted non-compensation costs of $91 million, were up 9% versus a year-ago, primarily driven by an increase in Travel and Related expenses as well as higher professional fees.
First, Travel and Related expenses were higher as a travel has picked up materially from this time last year, contributing to the trend we have seen all year. In addition, inflationary pressures have driven our travel expenses higher. Second, professional fees were driven higher by consulting and search and placement fees. And third, Communication and Information Services were higher than the year ago period relating to increase information service fees from higher license fee renewals.
We are very focused on our expense management practices both comp and non-comp. We are limiting incremental and replacement hires, and driving efficiencies across our non-comp base. We are rigorously reviewing how and where we spend with a focus on balancing between the near-term and the long-term. Our adjusted tax rate for the quarter was 27.4%, up versus last year, largely reflecting non-deductible expenses, including meals and entertainment, and stock compensation expenses.
Turning to our balance sheet. As of September 30, cash and investment securities totaled about $1.8 billion. Our excess cash as a percentage of our total cash and investment securities was in the mid-teens. We are constantly reviewing our excess cash position with respect to the current business environment. We are currently holding more cash than the prior quarter as market and economic uncertainty persists.
Our third quarter adjusted diluted share count declined to $43.2 million from $43.8 million in the second quarter of 2022, primarily reflecting the reduction due to the lower share price employed in the treasury stock method and our continued buyback partially offset by vesting.
In total, we repurchased 3.9 million shares year-to-date, and an average price of $118.28. Including dividends and share repurchases, we have returned 565 millions of shareholders this year to date. We remain committed to returning all excess capital not invested in the business to our shareholders over time. We will remain prudent and nimble, and we will opportunistically buyback shares, while maintaining a durable balance sheet.
Similar to what we have done this year, we will continue to offset the dilution from the RSUs that are granted as part of our annual bonus compensation process in future periods. With today’s macro challenges, it is critical we protect and grow our franchise, while also executing on our long-term capital return strategy.
Before we turn to your question, as John said, we had been through cycles like this before and have emerged stronger. Our diverse business model and financial position ensure we are well positioned to capitalize on the current environment and we are excited for the opportunity ahead.
With that, we will now open the line for questions.
Question-and-Answer Session
Operator
Thank you. We will now conduct the question-and-answer portion of the conference. [Operator Instructions] We’ll take our first question from Steven Chubak with Wolfe Research.
Brendan O’Brien
Good morning. This is Brendan O’Brien on for Steven. Just to start was nice to see you able to hold the line on the comp ratio this quarter. I understand that it’s your best estimate at this point in time and could change. But I want to get a sense sort of around what your assumptions are on deal timelines and like deal elongation relative to what you would expect to see in a more normal environment on last quarter? And what you said that deal you [won’t question] [ph] have gotten worse or stay the same over the past 3 months?
John Weinberg
I’ll just start with really how we’re seeing the environment. And then I’m going to let Celeste answer the question more specifically about the comp ratio. I think that the environment has slowed somewhat, but really, when we were looking at things the last quarter, we saw a lot of this and actually articulated it.
And from our perspective, we are seeing deals that are being discussed widely in boardrooms. We think that there’s activity, but we don’t think its speeding up and we see that it’s slowed slightly. But really, what we articulated last time and what we believe last time was our reflection for the year, and it remains so we really believe that this is where we will end up for the year. But things are changing, as you know, day by day, there are different views on recession and what that will mean, and we’re actually following it. We don’t really have a crystal ball at this point. There’s a lot more uncertainty than I’ve seen in a long time. But we feel pretty comfortable with where we are. Celeste?
Celeste Mellet
Thanks for the question. So, our – to give you a little insight into how we forecast in a short-term basis, we look at the quarter in particular on a deal-by-deal basis. And we have standards in terms of where – the likelihood of deals closing and when they close. On the margin, where we were unsure whether or not a deal would close in the current period, we’re generally assuming it will not. It’s not that we’re saying we’re adding a certain period of time, because it is very specific on a deal-by-deal basis. But our approach is more conservative.
And just given what we’ve seen, we think that is the right approach to thinking about how the year will end up for us, particularly as we’re doing our planning for 2022 and 2023. [As early stock] [ph] comp ratio, for the past 10 years, the fourth quarter has been the largest quarter for us, and hopefully will continue to be the same. And while we are comfortable with our estimate for the year as of today, it really will depend on what closes in December versus what closes in January, where most of the fluidity in the environment is really about when deals are closing more than anything. So, the December will be a really important month for us, the whole quarter will be important for us as it relates to the comp ratio.
Brendan O’Brien
That’s great color there. Thank you, both. And then turning to advisory business, when results this quarter, we’re once again surprisingly strong relative to what we’ve seen in the public data, which your commentary suggests is driven by your non-M&A advisory businesses. Could you speak to what your go-forward outlook is for these businesses in light of all the choppiness in the market and potential down further slowing global economies? And, additionally, specific to private capital advisory business, I noticed that the fundraising environment has slowed and is expected to continue to slow over the next 6 to 12 months, but at the same time, demand for liquidity from LPs and GPs is expected to head the other direction? I was hoping you could speak to your outlook for that business in particular as well.
John Weinberg
Well, our view of those businesses are, is that they are continuing to move along and we are seeing activity. There is no question though, there’s a current environment does impact those. We do have significant non-merger revenue. And the reason for giving that was that we wanted to make sure that we articulated the fact that the strength of our financial performance is really the M&A market plus all of our other markets.
Prospectively, we believe that those markets will continue to be active, but really trying to take out and really give a specific view as to how they’re going to perform is very difficult, and we can’t do that. But I would just say that, clients are still very busy, we’re still seeing a lot of dialogue, and really in those businesses as well as the merger business. There is a lot of activity and dialogue. And I think that there’s a significant amount of business that’s being discussed now whether those actually transition quickly into revenues as another thing, and I think that one is – a lot of that is going to be the economies and also the financial markets stability. Celeste, do you want to say anything more than that?
Celeste Mellet
Yeah, I think just to add to your question on fundraising. The team has really focused on raising capital for the very best. So the ability for the very best to raise is greater than for others in this environment, though, that everyone’s facing the same challenges with LP in terms of liquidity and things like that. So there have still very strong demand and very good receptivity for the deals with the bringing to market.
Operator
Thank you. [Operator Instructions] We’ll take our next question from Richard Ramsden with Goldman Sachs.
Richard Ramsden
Hey, good morning, everyone. And Celeste, congratulations on the new role. John, can you just expand a little bit on what you’re seeing on the restructuring side? I know you said last quarter that the dialogue was very active, but it hadn’t translated into assignments at that point. Has that started to change as we head into the year end, given that equity and debt capital is not widely available? And there’s obviously a very significant refinancing requirement for a lot of companies that went public over the last few years. Thanks.
John Weinberg
Thank you, Richard, for the question. And, yes, we did see real activity beginning in restructuring. And I would say that has continued unabated. There is just a significant amount of dialogue in our restructuring group is very busy right now. We’re really giving advice on liability management, as well as out-of-court bankruptcy discussions. The dialogues are very strong, and we are seeing increasingly activity coming in both on that and very traditional restructurings.
We think that default rates are going to begin to climb. We think that there have been significantly a pickup in downgrades, which is also – is contributing to this. So what we’re seeing is that the activity levels are really climbing. I don’t know exactly when that is going to translate into actual revenue. But our activity level continues to increase. And there’s a very, very healthy buzz to the restructuring group’s floor, because they’re actually very, very active right now.
Richard Ramsden
Okay. Thanks a lot.
Operator
We’ll take our next question from Brennan Hawken with UBS.
Brennan Hawken
Good morning. Thank you for taking my questions, and I also with echo, Richard. Congrats, Celeste, sorry to see you go so quickly. But I’m sure it’s to a great opportunity. Would – Celeste you touched upon slowing hiring, we saw the SMD headcount drop here versus 630. And yet, you talked about an opportunity to add talent. So could you help us consider how you’re managing the headcount, the expense base in this uncertain environment? And how should we think about the comp ratio? You had said 61% for the year, but year-to-date, you’re at like 60%, 60.0% something like that? So should we expect a higher comp ratio in the fourth quarter to bring the full year to 61? Or was the 61% indication more suggestion of a go forward from there, where it would be 61% for the remainder of the year? Thanks.
Celeste Mellet
There’s a lot of questions, Brennan, in one question.
Brennan Hawken
You’re limiting me to one, so I have to do a multiparter. Come on now.
Celeste Mellet
So, I just only take SMD question first. And John may want to add on this, because he is really driving a lot of work on the recruiting side. But what you’ve seen on reported SMD numbers, there’s a client sequentially. That is not indicative of, I think, anything there are a number of SMDs that are not included in that number. I believe we only include the ramps number there are very high number of on-ramps [ph] SMDs, I think, over 30 plus. So that is – that would include the people we’ve hired much more recently. As it relates to headcount overall, we have been working very carefully outside of the strategic hires to limit replacing hires, incremental hires very, very focused on sort of value versus the cost of each incremental hire.
And on non-comp, well, comp is our biggest expense, we’ve been reviewing our non-comps line by line, looking at how and where we spend, we have spend some good cost saving, but travel continues to ramp. This year-to-date, we’ve only been running around 50% of trips versus 2019 levels. So there continues to be more and more trips, which will cost more money. And as you know that costs that they inflate, the inflation on travel is higher as well. And we delayed certain projects that – long-term, we think will be very beneficial, but with short-term low cost money, so we’re managing the cost as tightly as we can.
As it relates to comp ratio, again, the fourth quarter is going to be really drive the outcome for the quarter and for the year. We have obviously, we’re very comfortable with our forecast, but it could easily go either way, we’ve looked at a lot of sensitivity. So, I think, the comp ratio is really – the comp ratio will be dependent on what the fourth quarter revenue looks like. You guys have newer forecast, we’d have ours, and hopefully, we’ll see things close quite well, and of course, as we go into December.
John Weinberg
So, Brennan, in the spirit of the multi question, I’ll just spend a minute on recruiting. As Celeste said, we are very much still in the market for high grade extraordinary talent. And this year, as I said, we’ve hired 7 SMDs, with 1 Senior Adviser coming on. But we also have a really good pipeline for next year, and we intend to continue to build. We think that the opportunity in this market is quite extensive. And in the areas that we’re thinking about and trying to build, there are some very, very talented people who are very much in the mindset of thinking about coming over, and so we’re very much investing in that.
Having said that, we are really trying to be responsible about headcount, we’re trying to be slow on replacements. We’re trying to make sure that we’re managing our costs as tightly as we can. We’re trying to really be sensitive to the fact that this is a difficult environment. We don’t know how much it’ll slow. So we’re trying to be – on the one hand, very careful with our costs, very careful and thoughtful about our headcount. But at the same time, we are very much thinking that this is a good time to be investing.
Brennan Hawken
Okay. Thanks for the color and the patience with the multiparter. I didn’t get – I think, Celeste, you made reference to the fact that not all the SMDs are in the SMD headcount. I can re-queue if you would rather. But I think that’s the first we’ve heard of that. Could you – if you don’t mind expand on that policy that might be helpful to understand?
Celeste Mellet
[This is follow-up for that…] [ph]
Brennan Hawken
Okay. We’ll do.
Celeste Mellet
Yeah.
Operator
Okay. We’ll take our next question from Michael Brown with KBW.
Michael Brown
Hi, good morning, John and Celeste. Celeste, congrats and best of luck to you.
Celeste Mellet
Thank you.
Michael Brown
So, I guess, I wanted to, you call that the strength in Europe in terms of the advisor results of this quarter? Could you expand on that a bit? And what’s your expectation for the regions in terms of the outlook there for M&A, but also for restructuring? And if you could add any comment specifically about the UK and the continent that would be helpful? Thanks.
John Weinberg
Okay. Sure. The European business has actually had a very good first 9 months, and there have been some very significant deals that have come through with some very good fees. The areas that have been very busy over there for us have been the national institutions, the utilities and the industrial side. And we think that those areas will continue with some activity. I think that really the prospects of that market are going to actually impact how robust that business continues. If there’s a significant recession over there things will flow.
And the one thing, I would say is that the activity levels, and the discussions have been quite full. I think we’ve a very good team over there, both in the UK, and we have several really strong relationships and very good players over on the continent.
And so, I’d say that that from our perspective, we’re watching carefully. But I wouldn’t say that that you should expect that there is going to be robust growth over there. I think, what you should expect, though, is that we’re going to continue to consistently cover those clients. And, I think that, if there are transactions to be done, we’re going to hopefully get our fair share, and we feel very comfortable, we are building and investing in that best sector of the world. We plan to continue to do that it’s a strategic priority for us. We think that there’s real opportunity for us and our brand, if we do invest over there. And so we’re really looking at those opportunities.
And I would expect that we will grow our business there over the cycle. I can’t say exactly that it will grow on a revenue standpoint, just because so much right now is determined by the market and the market uncertainties. And I think that we’re all watching that carefully.
Michael Brown
Thanks, John. And I’d also just asked about the restructuring activity in Europe as well, if you’re seeing any trends playing out there?
John Weinberg
Well, it’s very much the same as what we have in the U.S. I’m sorry, I missed that. We are seeing the activity level build there. Now our European restructuring business is not as big as our U.S. restructuring business. But we have some very, very high quality people over there. And we are actually seeing some quite promising activity levels there and some interesting assignments. So we’re definitely seeing that area develop. But, right now, we don’t know exactly when that’s going to translate into revenue for the firm.
Michael Brown
Okay, great. Thank you for taking my questions.
Operator
We’ll take our next question from Manan Gosalia.
Manan Gosalia
Hi, good morning, John and Celeste. Celeste, all the very best in your new role. My question was on, what are you hearing from clients on the impact of the rate outlook on their ability to do deals? So, with the expectations for the terminal fed funds rate moving to 4.5% plus, leverage lending markets are seeing a lot of pressure. I guess, in this environment, do we just need to see certainty on where rates are going, whether it’s 4.5% or 5%, or whatever the number is? And then we know what the rate is? So we can underwrite and get a valuation and do the deal. Or our clients saying that they need to see lower rates before they do some of the large deals and those large deals come back in a big way?
John Weinberg
Manan, it’s an interesting question. And I’ve actually been in several boardrooms over the last 10 days or so, discussing the actionability of deals. And what I would say my observation would be that for deals that really makes sense strategically; companies are not really as sensitive to race as they are about access to the market. And, as you know, right now, some of the markets leveraged loans and high yield and others are backed up some and there is some real congestion. And I think that that is in my mind the biggest issue. Rates are much higher than they’ve been, but they’re not higher than they’ve ever been. And I think that the companies that have really good prospects. We will be watching carefully see when the market will give them access, and then they’ll run the numbers to make sure that the strategic deals that they’re looking at still makes sense.
My own point of view is, it’s going to be more driven by the markets opening up and there being access. I think it does, as you said, and I agree with it, is that it’s a lot about certainty, and about some stability. And once that does begin to play, you’ll see companies beginning to be more aggressive. Clearly, it’s more opportune to do a deal in an up market than a down market, because then by definition, things are going to look better. But, I think, companies that really have important strategic needs are going to look at those as soon as they think that there’s actionability in the market.
Manan Gosalia
Great. Thank you so much.
Operator
We’ll take our next question from Devin Ryan with JMP Securities.
Devin Ryan
Thanks. Good morning, John and Celeste. And Celeste, congratulations. Most questions have been asked here, so just one question, one-parter. Just love to dig a little more into sponsor engagement and outlook. I know there’s been a lot of talk around sponsors, having kind of record dry powder on the flip side, sponsors are kind of licking wounds on recent investments that have been made over the last year or so with kind of record deployment activity. So love to just dig a little more into kind of what breaks that dam with sponsors, and isn’t just bid ask spreads coming closer together, or more, maybe competence in the economic outlook, but just when they can kind of more aggressively reengage with the record dry powder?
John Weinberg
Devin, I actually think it as much as anything stability in the market. I think, right now, a lot of the sponsor discussions, which continue, are really about what is the art of the possible to actually do deals. Now, clearly, sponsors are often more sensitive to actual right levels than big strategic might be, who have a lot of cash on hand, and real strong debt capacity. The leverage loan market, the high yield market does impact what sponsors are willing to do, and they’re looking at it carefully.
And in the situation like now, when the markets are much more backed up, that is really going to back off of with suspected sponsors, doing the traditional deals. Now, as you know, there’s been a lot of private debt and private debt complexes that are willing to put money to work. I think those 2 debris has slowed down some, there’s been a lot of private debt that has been put to work already.
In terms of your question, which is what breaks the logjam, I actually think the stability of the market, and really the market having the capacity to actually put more money back in. And so, there’s been several of the big banks and others who have some things that they need to absorb. Once that starts to have finished absorbing, people are going to be starting to in earnest, run these numbers and see what makes sense and works.
And so, I think the first step is working through some of the issues that are in the market right now. And then the second step is going to be whether buyers and sellers have expectations that are closer. I actually think that the expectations between buyers and sellers are actually coming much closer together for the simple reason that people are starting to really absorb, really what this market actually is. And I think there is a view that this may not overnight turn.
And as a result, I think that’s what’s made people’s conscious mentality be that. This may be what we’re dealing with for the next year and anybody who really wants to look at a deal or put their money to work that’s going to have to accept where the market is.
Devin Ryan
Okay, great. Thank you.
John Weinberg
Thanks, Devin.
Operator
We are approaching the end of the allotted time. I would now like to turn the floor to John Weinberg for any closing comments.
John Weinberg
Thank you all for joining. We very much look forward to seeing you next quarter. Obviously, we’re open to any interactions you might want to have with us going forward. Thank you so much.
Operator
This concludes today’s Evercore’s third quarter 2022 financial results conference call. You may now disconnect.
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