Before we begin, for important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. The use of photography or recording devices is not permitted. If you have any questions, please reach out to your Morgan Stanley sales representative. We are pleased to have with us Navid Mahmoodzadegan again, Co-President and founding partner of Moelis & Co. Navid, thanks for joining us. Great to be here, Devin. Thanks for having me. Let's start off with the M&A environment. It's clearly been challenging over the last year and a half. Can you update us on what you're seeing in the second quarter? Sure. well, you're right. It's been really since, you know, early last year, the start of the war really was sort of a turning point when the M&A market got more challenging and with, you know, rate hikes and inflation and concerns about the macroeconomy, it's definitely M&A volumes have dropped off considerably. I think year to date, volumes are down, you know, 30%, 40%, 50%, depending upon if you're looking at announced deals or completed deals. I do think things feel a little better here recently. I don't wanna predict that we've turned the corner. There's been other moments over the course of the last year where you could look at a period of time and say things feel better, only to then be surprised by a regional bank crisis or something else that sent things sideways again. You know, look, we continue to remain optimistic. I don't know when the M&A market will fully return. I do know there's still massive demand for M&A from the private equity community, from the corporate community. There are many reasons why transactional activity will return and will return, I think, in a major way. What's difficult to predict is whether that's gonna happen now, a couple of quarters from now, or even further out. I do think it will return, and most importantly, we're positioning our firm for a big return. On the April earnings call, Ken mentioned the pipeline was down around 20%. Now that we're a couple of months past that point, do you have any update to share on how pipeline has evolved? I don't have an official update. I will say things feel better. I think, you know, whatever the numbers were a couple of months ago, if we looked at them today, I think, you know, they would be better than they were a couple of months ago. But again, I don't necessarily wanna say that's a straight line up from here. But I think we're remaining optimistic. We are in front of clients. Our clients are expressing an interest to transact. You know, question's gonna be when the environment really promotes and allows transactions that need to happen to get to the finish line. Just to follow up on when you say things feel better, what's really driving that? Maybe you could share some color on the conversations you're having. Sure. Well, look, we're a couple of months removed from the last crisis, the regional banking crisis, that helps. That's certainly helped, you know, the credit markets. Credit spreads have improved since then. I think there's a hope that, you know, maybe we're near the end, if not at the end of cycle of rate hikes. I think there's a view, an increasing view that, you know, while we may technically head into a recession, it's not gonna be a really bad recession. When I mean a really bad recession, one, you know, that's signified by, you know, massive unemployment and a major turndown in the economy. Again, we'll see what happens, I think that's the view. I think you're starting to see, you know, the IPO markets start to open up or, you know, some companies hitting the IPO market and maybe some to follow, obviously, the equity markets are up 20% this year. Again, I'm not predicting that it's over and everything's gonna be great from here on out. Who knows what lurks around the corner? Certainly there's possibilities of, you know, other things happening that make this conversation more challenging or the outlook more challenging. You know, you asked the question, do I feel a little better today than I did two months ago? The answer is probably yes. On what's getting CEO confidence a little bit higher, do you feel like, you know, the biggest catalyst might be the S&P now in a bull market, or is it more about rate levels? I think when you talk about CEOs and corporates, I think so much of it is, you know, economic outlook. You know, the stock market is a reflection of people's view on where the economy is headed. I think when there's just lots of macro uncertainty, it's hard to get in front of your board and pound the table on a big M&A deal. It's hard when the regulatory environment's murky, too. That's a headwind that, you know, is there and, you know, may not dissipate until, you know, the next election. We'll see. I think the macro, when you were talking about corporate M&A, strategic M&A, macro is critical. When you pivot to sponsors, you know, financing costs obviously are a critical factor. We saw, you know, over the last year, a pretty big increase in financing costs, which takes time for the market to digest. Let's dig into the macro a little bit, then we'll go to financing costs. On the macro side, you know, investors are thinking through a really wide range of economic outcomes. One would be higher rates for longer with a soft landing, another would be a recession that maybe comes with rate cuts. Which of those two outcomes do you think is better for M&A activity? Look, I think stability, M&A needs stability. I can't remember which of your things is more of the stable view. I think. Higher for longer. You think higher? Yeah, look, I think higher is okay. as long as kind of it's within a, you know, rates are within a band and spreads are within a band, I think that's okay. I think a soft landing is clearly preferable to something that's more dramatic. That kind of environment feels to me like conducive to a quicker return to the M&A market. Let's talk about the financing side that you mentioned, which is more important for the sponsor group. You know, fundraising activity is light, but on the other hand, this group needs to put capital to use over time. It's their business model. What do you think will get things going with sponsors? You know, how big of a drag is this tighter financing environment? Yeah. Again, I wanna On the question of the fundraising environment is clearly harder, but these firms have still raised massive amounts of money and are still raising massive amounts of money. Yes, if you talk to any sponsor, they'll say it's harder to get money out of LPs, et cetera. You know, that just means some firms that wanted to raise $20 billion are raising $16 billion. It's still you know, kept in perspective, these are still massive pools of money that they're raising, not just across private equity strategies, but across strategic opportunities strategies, core strategies, direct lending strategies. When you look at the whole gamut of pools of money that alternative investment managers have to facilitate deals, it's massive, it's growing, and it's here to stay. But what all the sponsors want, and they're hearing it from their LPs, is they want distributions. And the only way to get distributions are for transactions to happen, i.e., selling portfolio companies, recapping portfolio companies, doing creative financings around those, putting them into continuation funds. Those are all areas where we play, and that's why I'm really optimistic that, you know, sponsors are gonna continue to drive, you know, big upturn in M&A volumes eventually, once kind of the macro and the rate things settle. Because they're in the business of doing deals, they're in the business of putting money to work, and they're in the business of returning money to their LPs, all of which needs to happen. Our firm is very well positioned to take advantage. When you say eventually, think through, you know, worst case outcome, maybe we have, you know, more macro volatility, financing gets even tighter. How long can this group sit? Could it be 3 years? No, I don't think so. I don't think so. I do think, Look, you know, you know, one of the, you know, exercises, you know, sponsors go through, others go through, is, you know, when there's a big move in rates or a big move in the, in the macro environment or in the stock market, you know, it takes some time to kind of reset your expectations of what your portfolio company is worth. You may have marks that you've communicated to LPs. you know, it's not unusual for people to say. Well, let me see, is this downturn in, you know, upturn in rates or downturn in the economy or a downturn in sentiment, is that temporary, or is that gonna last for a while? I think if it becomes something that's gonna last for a while, I do think the pressure to get money back, the pressure to put more money to work and raise money, but you only do that if you get money back to LPs, is. You can't sit around forever. You can't hold these assets forever. I think it does take time for expectations to resettle and recalibrate, but that'll eventually happen. When you think about the bid-ask spread and valuation, you know, how narrow is that gap relative to peak difference? Do you see that quickly narrowing, or is that still an issue? It just depends on the company. I don't wanna act like there's no activity. There is activity happening. I think right now, most of the activity we see is sort of the highest quality companies within the sponsor portfolios. The companies where, you know, where they sit, the sector they're in, the management team, the performance, even through some of the uncertainty, will still allow the sponsor to still exit at a really good outcome. We are seeing some activity along those lines. You know, sometimes those processes are a little different. It's not, you know, let's go run a big, you know, long, drawn-out auction because there's some risk around completion. Having more bespoke, tailored conversations, targeted conversations, creative conversations, is kind of more of what we're seeing. On the corporate side, how big of an impact is tighter financing there? Look, it has some impact, but look, you know, a lot of corporates, you know, it's not just about financing costs. They have plenty of access to capital, whether they're investment grade or using their stock. It, it's less sensitive to the LBO math that you'll see for a sponsor. For corporates, it's really more about, is this the right time to do it, given some of the uncertainties? Can I get it through regulatory? Is this the right deal to do, given what's happening, you know, in the strategic landscape? If I don't do it now, will one of my competitors do this deal and I'll lose it? Maybe that's moving up my timeline because I'm worried competitor X is gonna buy this company unless I can get to it. Those factors tend to weigh in a lot more than, you know, incremental cost of financing. Is there anything you're seeing on the structure of transactions that can, you know, maybe be more creative in getting them-? Yeah to the finish line? Yeah. More, as I said, more bespoke, more creative. You know, a lot of times, you have bringing in, you know, people who you know, that where you can kinda, you know, sit down and have a really creative conversation around a win-win transaction, you know? Again, we're in the middle of a lot of those kinds of conversations because, you know, we're not in a market where you know, you can, you know, run an auction and have certainty that a deal is going to get done, right? So, nobody likes to put an asset on the market and have risk of failure. A quiet or targeted creative conversation to see if you can get something done in a tougher environment has been much more relevant over the last, you know, 12 to 18 months. What about corporate cash levels? How are they holding up, and how are corporate thinking through, you know, the right level of cash and whether they tap into that? You know, look, I think with corporates, there's always kind of the debate about dividends, share buybacks, and M&A, right? I think it's less of an issue of having the availability of cash, because corporate profits have still been pretty good. It's about, you know, what's the best way to deploy that cash, right? Along the spectrum of those things. I think a lot just depends on, you know, the sector, the space, what's happening from a technological perspective, and where's your stock price? Is there more of a better return to buy your stock back, given what you know about your company and assets, versus embarking on M&A, which inherently has some risk as well. Right. Let's talk about your technology investment banking expansion. You recently made some hires there. Can you give us some color on how it's going, what some of the rationale there was? Sure. Look, we've been in the technology business for a while, but I think we've always felt that we were underweight the opportunity. The tech investment banking opportunity, especially in software, is massive, and we unfortunately, despite our best efforts, just didn't have the critical mass. We had some very, very good people, but not enough of them. We, despite our really rapid growth since we started the company, have missed out, and haven't gotten our fair share historically of maybe the most important fee pool in investment banking, which has always been, something we've wanted to rectify. This team, was a team that we had gotten to know four or five years ago. They were at UBS. We tried to hire them a couple different times when they were at UBS and couldn't get there. That was the process where we started to get to know each other. They learned about our culture. They got to meet a bunch of us. We likewise got to know them, and I always felt that this was the perfect fit for us. Culturally, the way they approached the market. Interestingly enough, that team is very sponsor-focused, and our existing technology team was more corporate-focused. When you looked at the spaces within technology, there was almost no overlap. You know, they were heavy in software and in edtech and digital infrastructure and payments, and we were in comms equipment and some other areas that were in digital media. When you put it together, it was almost a beautiful complementary fit of rounding out our sectors and covering not just companies, but sponsors. As I mentioned, we got to know them when they were about to go to Silicon Valley Bank to do an entrepreneurial thing. We tried to get them then, too. They decided to do that, much to our consternation, but we stayed in touch. When Silicon Valley Bank collapsed as quickly as it did, we moved in very aggressively. Again, we knew them, which helped a lot. They knew us. They had other opportunities, but we quickly were able to come together and not just hire 11 MDs and 35 people, but the beauty of it was, you know, if we went to another firm right now and hired 11 MDs and 35 people, I guarantee you there'd be lawsuits, and we'd be spending the next 2 years dealing with that. Because of the special circumstances around what was going on in SVB and the bankruptcy, we were able to reach a mutually agreeable settlement with them that released everybody from any threat of litigation, enabled us to get the bankers, I mean, they literally, most of them, were working on at SVB, and a week later, with our firm, so there was no discontinuity with clients. When we go hire bankers from other firms, they almost always have 60, 90, 120, 180-day notice provisions and non-solicitation provisions. These bankers were able to literally not lose any contact with their clients and start on our platform. There was a bunch of mandates that they were working on, and we came to a mutually acceptable arrangement around how we were going to split some of those fees. Very unusual for be able to hire that many bankers without upfront consideration, with no threat of lawsuits, and to collect fees right away, and to not have them lose touch with their clients. Really unique situation. We're incredibly excited about the team. They've hit the ground running. They're fitting in beautifully with the company. Our existing tech bankers are super excited about the scale and connectivity and leadership that that group is bringing. It's, I think it's going to be a home run for us. Great. Just as a follow-up on hitting the ground running, collecting fees, you know, right away, are these bankers fully ramped day one? How does that compare to how long it typically takes to ramp up? Well, the ramp up is much faster. Again, they didn't... They're pretty, you know, yeah, they're not fully ramped up at Moelis. They're just getting to know the other bankers and the product bankers, our M&A people and our capital markets people, so there is getting to know the firm and getting settled. But, you know, the good news is, they never lost touch with their clients, so there wasn't a period where they had to call their clients and say, "Hey, I'm going to another firm. I can't talk to you for 6 months. I'll call you 6 months and a day." That didn't happen, so I think their ability to continue to compete unhindered. It's great. there's been amazing reception from clients that they've gotten, that we've gotten, the number of emails and texts, you know, I got saying, "Congratulations, that's a phenomenal team," was overwhelming. yes, look, it's not... It's still, we're still in a tough market, right? Right. I don't want to suggest the tech M&A market is booming right now. It's still a tough market, but I feel really good about how they've integrated, and they're off to the races. When you typically do a hire, is it that six-month period after the phone call where you start to see the ramp accelerate, or is it a little-? Yeah, I think what we typically say is, look, it takes a number of months for them to get to the firm, and then it takes 12, 18, 24 months for them to get up and running, introduce their clients to our platform, get some deals signed up, get deals closed. It takes a while. We've been able to substantially accelerate that with this group. Look, it's not the only hiring we're doing. Over the last year, we've had 30 new MDs, 8 of those, internal promotes, which is a pretty typical amount for us. Twenty-two of them, so half of the 22 came from SVB, half came from other places. They've helped to fill out important positions in healthcare services, in private funds advisory, in capital markets, in Europe. We're really excited about that group as well. Industrials, we hired a banker from Credit Suisse. We have more announcements coming. We're really excited about... Look, for those of you who don't know us, I think we've been saying for years now, and people say: Well, why don't you have any debt? Why, why do you keep the balance sheet so clean? Why aren't you doing more of this and more of that? We've always said: We want to keep the company flexible. We want to keep resources and powder dry because there will be a downturn at some point. There will be a dislocation at some point. Just like, you know, in the financial crisis, we see those opportunities as the opportunities to really hire the best talent consistent with our culture, be aggressive when others are retreating, be a, you know, kind of go for it when there's chaos. This is a perfect example of why we've kept our powder dry to be able to be aggressive. The SVB team is sort of the perfect example of that, but it's not the only example of that, and we continue to be aggressive. Again, we're the best bankers, and just as importantly, consistent with our culture. We want to be part of what we're all about. I have a few more questions on the environment, but before we get to that, this is a good segue into talking about expenses, since we're discussing hiring. In April, the firm guided to an 80% comp ratio for the full year. Can you give some color on how you're managing comp, how much, you know, contribution to comp these new hires are, contributing to? At what point do you start controlling comp more aggressively and not let it be as much of an output? Sure. I mean, look, what we didn't want to do. I just mentioned that, you know, we kept the powder dry to be able to go on offense. Well, if you're in a tough revenue environment, what you don't want to do is then have a unnatural barrier, which is compensation ratio, to then limit your ability to go on offense, right? You just, you've had all this flexibility. You want to go on offense, you see all the value creation opportunity. You don't want to let comp ratio, which we take seriously. We've always taken very seriously. It's part of our thing with our investors, that we're not going to be, you know, we're going to be shareholder friendly when it comes to compensation ratio. You can't do that when you see this massive growth opportunity in front of you in a tough environment. What we said is, for a period of time, and we gave a target, for a period of time, we're going to focus on growth. We need to continue to fairly pay our existing talent, right? At the junior levels, at the mid-levels, at the partner levels, especially the people who are producing. It would be self-defeating to not pay those people who've been doing a great job on our platform and continue to do a great job. That all means, in a tougher revenue environment, that you can't keep the 60% and not do damage to the firm. We've said for a period of time, we're going to transition. Our goal is to get back to that, you know, once our new hires ramp and once the market improves, and that's the goal. Is the hiring a significant contribution to the 80%? Hiring, it's. Correct. a combination of hiring and revenue. Yeah. Got it. Is there any point where you start controlling comp more aggressively, relative to ratio? Yeah. Look, as I said, my expectation is that the return on the investments we're making and the return of the market will solve the comp ratio together. That's what should happen. Again, when does it happen? You know, we'll see. That's, I can clearly see the most likely scenario in my view is that happens, where, you know, our existing talent feels like they've gotten paid well and fairly through the investment period. Look, what you can't do is say to your existing talent, "Hey, we're going to cut you back so we can invest in these people," right? Both sets of people need to feel good about that. Our shareholders need to feel good about that. What we're trying to do is balance all three of those constituencies, and kind of bridge us through a period where, you know, we can get back to the kinds of ratios that we've historically operated under, which we think are fair ratios of the bankers relative to our investors. Does that make sense? Yeah. No, that's very helpful color. On the non-comp side, are you still comfortable with the $40 million quarterly? Yeah, we are. Right? We are. Yeah, Okay. We are. maybe over time that ticks up a little bit with, you know, headcount, right? I think for now, we feel pretty good about that. Great. Let's flip back a little bit to the strategy. We talked about leaning into investment banking, technology sector. Are there any other sectors that you're maybe beginning conversations with, and wanting to lean in more on? I mean, look, there are other spaces. You know, healthcare, you can never have enough great healthcare bankers, so we're always talking to people in that space. We're always talking to people in, you know, in a lot of these spaces, there's tech elements and technology changes that are happening and new crops of companies that impact certain spaces. That's foreshadowing, I think, a set of hiring we're going to be announcing soon. There's talent in Europe that we're always looking to add there. More critical mass in Europe is good, especially in some countries. Look, even in spaces that are really built out, we just added to our media team in sports, for instance. Sports is an area that we're doing a lot of work in, that we're very focused on. We see a massive opportunity there and are already doing a lot. We hired an MD to help elevate our sports franchise recently, Private Funds Advisory, capital markets. You know, we're making investments across the board. Again, I think in all of these areas, these are fee pools that are important, they're growing, and we're hiring talent that I think is going to be highly productive. What about the outlook for the different sectors? Are there any that you see a rebound in M&A happening more quickly? You know, look, we can go through them all. I still think that the spaces that have been good spaces where, you know, there's dynamic growth, again, tech, healthcare, media, you know, lodging, leisure, those kind of areas, I think are going to be big. Obviously, AI is something everybody's talking about. We'll see where the investment, you know, the revenue opportunity is in terms of banking. Some of those companies, I think, you know, AI has an interesting opportunity for companies like us on the cost side. You know, too early to say what that means, but, you know, I do think I do think there are scenarios where we can use AI to be more efficient in terms of our delivery of the best service to our clients. What about the regulatory environment? Is that impacting? Yeah -sectors, more than others? I mean, we all know that it's tough right now. Where's the biggest headlines? The regulatory focus seems to be mostly tech, healthcare, right? There's lots of deals that you all know about in those spaces that seem to be getting most of the attention of the regulators, but it's not just there. I mean, look, and it's not just the deals you read about. It's not just Microsoft, Activision, or Illumina that are obviously, you know, right in the crosshairs of the regulators. Now every conversation you have where there's even a remote risk of a regulatory issue, it starts to impact the conversations and the likelihood of getting transactions done. You know, if a deal has a 10% chance of getting in the regulatory crosshairs and, it getting blocked or challenged, then we now need to have a conversation about risk sharing and who bears the brunt of that, and what do this side need to do versus this side need to do to remedy that and pay breakup fees. It introduces a whole set of issues and conversations which you have to deal with, which you may or may not get through, in order to get a deal to the finish line. It has a chilling effect, not just on the deals you read about. It has a chilling effect on the deals that people don't even attempt because there's a high likelihood they're going to get challenged. It even has a chilling effect on the margin, on deals that have a low likelihood of getting challenged, but you have to deal with a set of issues that are uncomfortable to deal with. How far down the deal size spectrum are those concerns? Yeah, obviously, the biggest deals are getting the most scrutiny, and the deals in those spaces, like healthcare and technology, seem to be in the crosshairs. Look, you know, we're working on deals in the middle market where, you know, the lawyers say, "You know, I know this sounds crazy, but, like, that deal could get a Second Request. Then once you get a Second Request, who knows what happens?" You start going down the rabbit hole of people seeing ghosts on some things. Look, generally, I think smart people can get through those things, but it does make it more challenging. No doubt about it. Let's take a pause there. We have a few minutes left. Are there any questions in the audience? We have a mic. Yeah. Hi, I have a question just philosophically about comp and investing through the cycle. When you look at your compensation ratio historically, and we're going through this period, and I understand you're investing, but it seems as if shareholders almost take a disproportionate risk of the downside and don't really get a lot of the upside. You know, most people think 2021 was this crazy good year that we'll never experience again, yet your comp ratio was, you know, a little bit above the average between 2016 and 2018. When we get into a better cyclical environment, are you going to continue to invest, or is it possible that you'll show more leverage there, so that, you know, everybody participates in a better environment? I appreciate the question. Look, you know, part of the reason... Look, our goal is to always show our investors, you know, leverage in the model and, you know, be fair about, you know, returning to our investors, you know, the benefits of leverage in the model, right? You know, then you get into the question of, right, oh, is it 60 or 58 or 59 or some other number? If your revenues are higher, should it be 56? Like, we can debate all of that. I think if you take a step back, since we've been public, we've returned, I don't know, $31 of dividends to our shareholders. I think that's hard to argue that's not a good return of capital and a responsible return of capital to our shareholders. You know, we've grown the firm significantly. We've tried to be thoughtful, every time we've tweaked or modified, and obviously, this year was more than a tweak. The compensation ratio, we've done it all with the mindset of, you know, long-term value creation. We've all done it from the mindset of being major shareholders in the company. You know, I appreciate the question, and you can always have a debate on the margin about, you know, on the margin, what the right return is. I do think unequivocally not letting the compensation ratio in a year like this hinder your ability to do game-changing hiring, I think is the right decision. I don't know if I answered your question, but that a gain, I think if you look at, look at it in totality, for a company that's bought back a bunch of shares, returned $30 of dividends, grown the company, you know, kept a clean everything, you know, whistle-clean balance sheet, no hidden anything. I don't know. I think it's a pretty good, very good track record of being shareholder-friendly. All right, we have 2 minutes left, and we haven't touched on restructuring. Maybe we could just end with what you're seeing on the restructuring side, how steady and large is the pickup in activity there, and when should we see that start to hit your P&L? I think there's definitely improvement in restructuring activity, volume, conversations. There's been an upturn in, you know, bankruptcy filings, for instance, this year. We've been involved in some of the most important of those. Our teams are busy, and I think if you kind of look at, you know, this major set of maturity walls that are really a remnant of all of the deal and LBO activity that kind of happened in 2018, 2019, 2020, 2021, et cetera, you have major maturity walls coming up in 2024, 2025, 2026. A lot of those companies, you know, there's change happening in those industries, technology change, structural change. A lot of those companies, unfortunately, aren't going to be able to refinance through those maturities. I think there's gonna be a lot of, not just bankruptcies, but a lot of, you know, balance sheet restructuring, recapitalization, activity around many different names. I think it's just gonna be a drawn-out cycle with a lot of activity over a bunch of years, and we're really well positioned for that. When you enter into a restructuring contract, when does that hit your P&L? Is it a 1-year lag, a half-year lag? You know, restructurings are funny because, not funny, but they're unique in the sense that it's the one area where once we really start digging in and really start spending time, we do generally get retainers. That creates a nice, you know, kind of steady income stream for oftentimes many months, sometimes years, before there's an event. They do tend to take a long time. You know, even out of court, deals tend to take a long time to happen. Sometimes that just means you're working on deals for a while before there's the back-end event. The good news is, oftentimes you're, you know, collecting retainers along the way, which helps. Great! Well, Navid, thank you so much for... Thank you, Devin. I appreciate everything. Thanks for having me. Thanks. Great to see you. You too.