PJT Partners Benefits From Restructuring Amid Clearer Macro Picture (NYSE:PJT)

Published on the Value Lab 11/24/22

We have very robust capital markets coverage on SA, where we cover almost every advisory house on US markets. For those that have restructuring franchises, the issue of low converting into actual deals from dialogue about strategy and macro has been an issue in bringing out the latent countercyclical demand from these segments. PJT Partners (NYSE:PJT) probably has the most aggressive slant towards restructuring revenues, being very specialised in these sorts of deals. They are beginning to see growth in those markets, and we think it’s coming from greater macro certainty and hopefully a cure to dead LevFin markets. Macro is bad, make no mistake, but it just needs to be certain for corporates and financial sponsors to start making moves and for intermediaries to be able to help them. We see modest resilience in traditional advisory and expect strength in restructuring over the next year.

Quick Q3 Performance Note

Q3 revenues are up 15%, and on a 9 month basis the revenues are up 9%. Park Hill which is the placement business is up, restructuring is up and strategic advisory is up modestly. Restructuring is a major revenue contributor and is driving the results. This means that evidently, dialogue as these companies have put it is converting into results. This is not something that can be said for competitors, and is a testament to PJT’s market positioning. Comps have risen a little, by 10% sequentially, driven of course by campus recruiting season but evident of hiring plans continuing. Indeed, comp ratios are ahead YoY as well as catch up for slower 2021 hiring seasons due to our common sequestration. Compensation expenses are up about 30% YoY. Net income growth is therefore 0%.

Bottom Line

Rising compensation expenses are fine by us, because it has been clear that over the last 6 months latent demand for restructuring has been building, which for now has been a stable revenue contributor. There are two things that are needed for restructuring to really grow, and that is certainty in interest and inflation rate outlook. This will solve everything. PE will finally get the confidence to move again after the last wave of investments likely underperforming. At the same time, sellers will get a reality check on the valuations they can expect over the next couple of years. Finally, LevFin markets which have been basically shut for months should open as debt markets understand where their loans will stand, and the second hand debt market equilibrates so new issuances can begin. On top of a lot of maturities coming in 2023, we should see a bit of unleashing happening in the sponsor business, which will throw a bone to Park Hill, but then of course of restructuring profile deals. Finally, we think greater certainty should continue to drive the strategically important deals in M&A, where similar to financial sponsors, corporates should have more confidence to move on M&A activity not of a restructuring profile.

We think interest and inflation rate forecasts are going to be more manageable now since there’s a sign that the back of inflation can be broken, although we think that there will be continued rate hikes up to 6% and maybe beyond as the Fed plays it safe. In other words, markets will feel some pain but there’s at least some definable margin of safety that can be the basis of negotiation between parties. Certainty was the catalyst and the peaking CPI figures provide more of that to market actors. The delta will be good for PJT and we think net income growth is coming.

The problem is the multiple which is 18.4x PE. While PJT can pull off revenue growth these days, we think there are plenty other businesses that have restructuring franchises that can pick up the slack and certainly excuse multiples that are less than a third of PJT’s. Moelis (MC), Perella Weinberg (PWP) are both businesses that we’d prefer here. They are at collapse multiples, and they both have latent restructuring franchises. Even Lazard (LAZ) is a better pick with a 9x multiple and an anchor coming from the asset management business. 18x is just too much to pay for the guarantee of countercyclicality given where rates are at. 18x is barely above 5% earnings yield against a reference rate that’s almost the same. A pass for now.

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