Perella Weinberg Engages Full Throttle On Share Buybacks (NASDAQ:PWP)

Published on the Value Lab 23/8/22

This has been a really interesting quarter for Perella Weinberg Partners (NASDAQ:PWP). There are some points of resilience. The sectors that are struck by distress are also those where PWP has strong franchises. Europe is the stronger geography, and some of it is out of the need for strategic moves before financing conditions possibly get even worse. Sponsors have not delivered previously expected backstops – they are in total pause. But the revenue is flat with respect to Q1, which was not expected nor guided for. They are also buying back 20% of their shares and buying out warrant holders. I’ve never seen such an aggressive buyback strategy before.

Q2 Results

There are many interesting points to balance, so we will simply list them:

Pros

• Europe remains a pretty resilient M&A environment, and PWP has a strong franchise there. Strategic investments are picking up in things like renewables, but also in other areas where Europe has traditionally been behind the US, like in TMT. Overall revenues are down 29% for the H1 YoY but are flat QoQ.
• Urgency investments are also picking up in Europe. It is a perfect storm there of geopolitical factors and economic factors. Companies that need to shore up balance sheets are engaging in as many transactions as they can to raise capital. Since equity and debt markets are virtually closed, this means a lot of real estate and infrastructure sales are happening from corporates into a still flush-with-cash sponsor market. This has been the second point of European resilience and has started to reveal itself in July.
• PWP has quite a few dedicated restructuring partners and a lot of people in capital solutions where there is overlap with restructuring. A lot of maturities are coming due in the next three years, over $700 billion in debts. CCC credits have doubled in rates, and those companies will struggle. Leveraged finance markets have effectively closed, and this means credit risk spreads are really high. This is creating a latent push for the restructuring exposure and has resulted in ‘dialogue’, as these companies love to say. Nonetheless, the contribution from restructuring could be quite substantial and a major offset potentially in 2023.
• PWP is buying back shares full throttle. They have already bought back over 10% of their shares YTD, and they are going to buy back almost another 10% according to their March-initiated repurchase program. They are also going to offer to issue 0.2 shares per PWP warrant to give warrant holders the option to liquidate their out-of-the-money shares for at least something. Exercise prices are about $11, so they’re liable to dilute by about 2%, rather than 10% which is what would happen if they exercised normally. That’s a pretty good save if warrant holders accept.
• PWP is hiring partners who want to move into the independent space, where bonuses are going to drop at BBs.

Cons

• Sponsor activity is generally looked on as potentially resilient due to all the drypowder. Despite the falling valuations, credit conditions have meant that they’ve not moved forward, risk tolerance being lower in the current environment.
• Because mega-cap deals are over, fee per client is falling, and transactions have become more complicated to execute in the current environment. This lowers the yield on headcount.

Conclusions

Where do we stand, then? There is a lot of short interest, about 7%, on PWP likely from its de-SPACing days. Still, this is something that could unravel to the upside in a short squeeze. Moreover, the PWP brand is premier in financial advisory. They have offsets, including with sponsors which have paused for now, but also in restructuring, that could matter quite a lot if 2023 gets tougher on veritable macroeconomic declines. The share repurchases are aggressive, and we really like that. They were likely executed at superb prices in the recent trough. Prices are still low now. The arrow in blue indicates where the majority of repurchases might have started.

On the other hand, the economy could get a lot worse, and break fully through points of resilience. There could be blood on the streets. While PWP will likely survive, albeit battered, better prices might still await. With the recent increases in PWP’s price but also in US markets in general, maybe it’s better to wait to see what the quite obvious latent issues in the market will do over the next couple of months, as the Fed continues to react to inflation and unemployment data. There is some unforced aggression in the prospect of investing here. But still, we are beginning to see PWP as a compelling champion within the independent advisory space.

If you thought our angle on this company was interesting, you may want to check out our idea room, The Value Lab. We focus on long-only value ideas of interest to us, where we try to find international mispriced equities and target a portfolio yield of about 4%. We’ve done really well for ourselves over the last 5 years, but it took getting our hands dirty in international markets. If you are a value-investor, serious about protecting your wealth, our gang could help broaden your horizons and give some inspiration. Give our no-strings-attached free trial a try to see if it’s for you.