Maksim Labkouski
Published on the Value Lab 11/26/22
Perella Weinberg (NASDAQ:PWP) saw a pretty decent earnings performance. They have plenty of mandates, and really the declines are coming from a falling velocity of closing. Relative to the rest of the industry they are seeing much less M&A declines and shows wins in market share. Restructuring is within their scope and this will be an increasing revenue contributor as the LevFin markets settle and actions can be taken to refinance and restructure. Sponsor activity should recover even if there is a risk of a structurally lower level of activity. They are investing in the capital advisory business too which should see some nice medium-term support, but we are more interested in restructuring where they are already positioned. Looking holistically, we think there is more to like in Moelis (MC).
Q3 Update
The Q3 earnings call saw pretty limited declines in revenue at only around 18%. Compared to broader M&A which fell 30%, this is a sign of won market share, consistent with the very strong reputation of PWP and their track record in more complex deals and environments. Generally, they have a resilient profile thanks to a name in restructuring but also a reputation that has kept their pipeline totally full, and their backlog down in dollar value only because of reduced velocity of closes.
This idea has been key: since deals are becoming more complicated with an environment that is more uncertain and with capital that is more precious, the average deal takes longer to close and recognize, and this just puts a damper on revenue evolutions.
Pipeline is really the gross picture of our engagements going forward, mandates and otherwise, but it’s maintained a very strong level and is only slightly down from last year. The net backlog is what’s lower and that’s for the reasons you cited because of elongation of deal closings and just the difficult financing market.
Peter Weinberg, CEO of PWP
Speaking broadly, M&A has also come down because LevFin and other dimension of the capital markets have been shut, and sponsor activity which was a huge wallet in the past few years has reversed substantially. While there is still a lot of dry-powder, big ticket LBO style deals aren’t happening right now as LevFin markets digest a higher rate environment, and volatility on the secondary markets for private debt calms down so new primary issues can start again in a safe environment. The only upside here is that strategics are seeing less competition from financial sponsors, and this is putting some into action that would have otherwise refrained.
Again, restructuring dialogue has gone up, but in some of PWP’s peers we are seeing concrete increases in restructuring revenue that seem to be driving a meaningful chunk of the results. So some of the latent demand is materializing. Moreover, as we see more certainty in credit markets we can expect that more restructuring activity will be possible as the full breadth of financing options become available before major maturities start coming in 2023.
PWP was vague on this point, but they have been investing in the capital advisory business. This is a more resilient business in a downcycle, and benefits from complication in considerations like FX and value differentials in different markets, exposed differently to key geopolitical threats, with Europe to the energy crisis as an example. However, compensation and benefits have gone down. This is partially due to lessened bonuses, but is surprising given that this is the recruiting season. So we question the dynamics of their investment into their various franchises.
Energy was apparently a nice contributor to the PWP results, as strategic activity has gone up there. While leverage is less of a concern for oil companies which have all struck it rich this season, political considerations surround buybacks and dividends might force them, for better or worse, to look into renewable transition, or something else that will create engagements for financial advisors including PWP.
Bottom Line
The company is still unprofitable this year. Operating income is negative as is net income on a quarterly and nine months basis. The issue is the massive revenue peak they had in 2021, and the operating leverage coming from compensation and benefits. Travel expenses were actually almost 15% of the losses generated, and have incremented substantially as the pandemic considerations pass.
While the substantial repurchase of shares, which we estimate to have equaled 10% of the market cap, occurred at favorable levels and have accreted ownership very meaningfully, eclipsing even the options that were outstanding, we still prefer the economic profile of some of PWP’s competitors. Moelis also has a good restructuring franchise and a superb brand. Moreover, it is consistently profitable and has been a handsome dividend payer for years. While PWP’s reputation is top class, the evolutions in compensation expense are a little questionable, and the net losses are a concern. Based on 2021 figures and current prices, PWP trades at more than a 20x multiple in PE, while MC is trading at 13x and this is LTM, including the difficult last 3 quarters. Both have a lot of the same puts and takes, often in similar proportion. We prefer Moelis.
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