2023-08-12 10:36:00 ET
Summary
- Perella Weinberg has been aggressive in dealing with the current downcycle in M&A, buying back shares and investing in talent.
- The firm has seen growth in tickets and deal volumes, but there are concerns about the European market and the rebound is likely to be quite slow-paced.
- Hiring costs have impacted operating profit, but the investment is expected to show returns in the near future as the new hires ramp up to the company average in productivity.
- While PWP is pretty attractive, we still have general outstanding concerns about macro and don't want to risk funds on an issue that has already risen quite a lot.
Perella Weinberg (PWP) has been impressive. While their reputation is well known to be stellar, they've been especially aggressive in dealing with the current downcycle in M&A. They were buying back shares hand over fist at the very lows in its stock price with double-digit buyback programmes which they proceeded to double later on once low levels were reached again. They've already done another 5% repurchase YTD. Also, its partner and MD pool is all rather new, and major talent investment at lows before a rebound has created massive latent earnings growth as partners and MDs are still well-below max ramped-up productivity. With there finally being signs of a turn in the M&A cycle, even if slow, PWP strikes us as a top-tier pick even though it's rallied from lows. With less cycle-calling risk, it's still a good jump off point. However, timing may be a little tough, since the rate hike story isn't completely over and Europe still has a ways to go for inflation to be passed through.
Key Points Q2 2023
Since additions from the 10-K report, they now have 125 MDs and partners. 30% of their MDs and partners have been with the firm for less than three years. Average revenue per partner and MD is about $5.3 million annualised, which is already hitting standards for an advisory boutique of PWP's profile despite hiring at a weak point in the M&A cycle, with this year already seeing around 20% growth in MD and partners at PWP, and the fact that it takes some time for new hires to start ramping up and becoming productive.
In normal times , a similar firm might have around $5 million per MD, and PWP has already achieved that. It's conceivable that this figure grows by about 20% or so purely from ramp-up of partners, and then another 50% once the M&A cycle is back to normal, considering that we've seen 50% declines in completions across the industry.
Revenue is up YoY 10% for PWP which is a great accomplishment compared to peers which declined, matching Lazard ( LAZ ) in its sequential growth also of 26% in advisory. PWP is getting ahead of some strong members of the pack.
Deal volumes and deal tickets are growing, and there is also a lot more business in private debt and capital, consistent with other firms' reports. Clients are accepting that this is a higher cost of capital business environment now and are beginning to come back to market. Restructuring on the liability management side is also gaining momentum in Europe and the US, and this is linking well with an increased focus and outreach to private credit markets for new avenues of financing.
Bottom Line
Things are still slow. There isn't evidence yet of a major sponsor rebound, which may come next. Also, there are some reasons to be concerned about Europe. While the European franchise has been a resilient part of the business for PWP, lagged effects from what will likely be a longer-going rate hiking cycle creates potential problems for the recovery path in European M&A. PWP reports that the trends in Europe and the US are currently the same, but it's unlikely that this can last when Europe has greater economic troubles than the US at the moment, also having been slower out the door with rate hikes, which made sense in the context of the Ukraine war. In the end, Europe is unlikely to outrun the fact that it is more exposed to the supply chain issues that followed the Ukraine invasion.
Also, PWP peers seem to be of the opinion that the rebound may be slower. While PWP has some great franchises and can afford to be aggressive with hiring, it will take a little bit of time before revenues actually grow, and MD productivity becomes relevant.
Hiring comps costs have thrown the operating profit into negative territory. This investment should show some initial returns this quarter, and the aggressive hiring is likely well-timed. If the new additions start getting close to 2/3 of the average revenue per MD figure as of right now, they'll have mostly offset the new comp bill. But for the full inflection into major and sustained earnings growth, it may take a year or two from now still. We think PWP trades at a coarse estimate of about 8-11x PE on normalised earnings after some recovery. That's the same as Lazard, which has been less resilient in advisory and has less scope for growth due to the AM business compared to PWP. However, these earnings estimates are very tentative, since so many factors like P/L share, the actual magnitude of recovery and other macroeconomic factors are impossible to predict precisely. Still, PWP is looking somewhat attractive at these levels. However, it's still very tough to call, and we'd prefer to sit on the sidelines.
For further details see:
Perella Weinberg: Substantial Counter-Cycle Investments