PJT Partners Has Restructuring Spring, But All Markets Are Closed

Published on the Value Lab 25/7/22

We were rather optimistic about restructuring last time we covered PJT Partners (NYSE:PJT). Dialogue was apparently picking up, which it surely was, but that didn’t mean we’d see benefits quite yet. We think we may have jumped the gun on the thesis. Banks have slammed the breaks on fund-raising markets as of now and it’s hard to get financing for all sorts of deals. Walgreens Boots Alliance (WBA) failed to find a buyer for Boots, which is even performing well, and surely the LBO space is struggling to execute right now affecting PJT’s alternative asset franchises. Moreover, while rates are rising and inflation is an issue for lots of companies, it’s still a modest rate in the scheme of things, and with plenty of fixed rate debt in the system, we might be waiting a while till restructuring picks up. We think more economic hurt is to come before the dust settles and the environment is ripe for restructuring activity.

Macro View

The macro view is now that while we already have what could be reasonably called a recession, the more serious and pernicious recessionary effects have yet to kick in. One of the scarier ones in the unemployment spiral. Companies might be trimming fat for now, but as rates rise, regardless of who’s getting fired, income is leaving the economy and making those fixed costs more of a problem for corporates. This creates a vicious cycle of layoffs. Such an unemployment spiral would be the next leg of this macroeconomic saga that makes a soft-landing in our view impossible. But it will create the environment for restructuring.

Connecting to PJT

As a former investment of ours, we want to think about how this connects to this prospect. Firstly, we think that for the very established restructuring franchise that PJT operates, the time has not yet come for restructuring. Indeed, the dialogue is growing with clients. A need is being foreseen, but higher rates and more economic woe will be needed before companies are in serious threat and will need guidance. The unemployment spiral would be a good start.

With the land still not fallow for PJT to restructure companies, the other segment could ideally help. In principle, the Park Hill franchise that PJT runs for sponsors could be a more promising area. Certainly, certain sponsors are going to be having troubles executing right now with leveraged finance markets probably still quite shut since the beginning of the year. LBOs are the ones that are being curbed right now, and we’ve seen this in some cases where unnamed sponsors failed to consummate large ticket transactions that have a history with PE. These high-ticket transactions are typical of LBOs and are financing intensive, which will be bad for these alternative asset-facing franchises. While there is always some activity appropriate for the environment, we think it’s still tough to allocate right now and that Park Hill will at best be resilient.

Conclusions

PJT currently trades at a 16x PE multiple on forward estimates, assuming some limited growth. That multiple reflects market expectations that restructuring will be an impetus for much higher income at some point in the relatively near future. This is evident by comparing with other financial advisors like Moelis (MC) who are trading in the low single digits in terms of PE, despite having some offsets of their own. We don’t expect this growth yet, and are comfortable waiting to see what happens with the next leg of the macroeconomic cycle. Will there be an unemployment saga? Presumably, everything will fall then and PJT will be an even better opportunity with a fecund market of corporates in need of help.

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