Evercore Inc
NYSE:EVR
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Evercore Inc
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Good morning, ladies and gentlemen. Welcome to the Evercore Third Quarter and Nine Months 2018 Financial Results Conference Call. During today's presentation, all parties will be in listen-only mode. Following the presentation, the conference call will be open for questions. This conference call is being recorded today, Wednesday, October 24, 2018.
I would now like to turn the conference call over to your host, Evercore's Head of Investor Relations, Jamie Easton. Please go ahead, ma'am.
Good morning and thank you for joining us today on Evercore's third quarter and nine months 2018 financial results conference call. I'm Jamie Easton, Evercore's Head of Investor Relations. Joining me on the call today are Ralph Schlosstein, our President and Chief Executive Officer; John Weinberg, our Executive Chairman; and Bob Walsh, our CFO. After our prepared remarks, we will open the call for questions.
Earlier today, we issued a press release announcing Evercore's third quarter and nine months 2018 financial results. The company's discussion of our results today is complementary to that press release, which is available on our website at evercore.com. The conference call is being webcast live on the For Investors section of the website and an archive of it will be available for 30 days beginning approximately one hour after the conclusion of this call.
I want to point out that during the course of this conference call, we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties, and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. These factors include, but are not limited to, those discussed in Evercore's filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. I want to remind you that the company assumes no duty to update any forward-looking statements.
In our presentation today, unless otherwise indicated, we will be discussing adjusted financial measures which are non-GAAP measures that we believe are meaningful when evaluating the company's performance. For detailed disclosures on these measures and the GAAP reconciliations, you should refer to the financial data contained within our press release which, as previously mentioned, is posted on our website. We continue to believe that it is important to evaluate Evercore's performance on an annual basis. As we've noted previously, our results for any particular quarter are influenced by the timing of transaction closings.
I'll now turn the call over to Ralph.
Thanks very much, Jamie, and good morning, everyone. Before we review the quarter in greater detail, let me just make a few comments on Evercore more broadly and the environment in which we are operating today.
Year-to-date, 2018 has been a strong year, both for Evercore and for the advisory business more broadly. The current environment provides meaningful opportunities to work with clients on a broad variety of matters, allowing us to sustain the momentum that we have built over the past several years. On a year-to-date basis, we have grown our Investment Banking business by double-digits and we are projected to once again grow our market share of advisory fees among all publicly-reported firms on a year-over-year basis. We remain optimistic that we are well-positioned to sustain this momentum in the coming quarters.
We continue to invest in new talent and capabilities, investments that have both broadened and deepened our client relationships and diversified our fee streams. Our broad range of advisory capabilities and broader sector coverage are helping to bolster our strong backlog and to position us for future and longer term success. Our equity capital markets activity is expanding in sector reach and role as we have generated $73.4 million in underwriting revenue in the last 12 months, up 75% compared to the 12 months ended a year ago.
Our Evercore ISI team has once again been recognized by Institutional Investor as the top independent research firm in the U.S., marking the fifth year in a row that the team placed in the top five firms among all firms. We ranked number four among all firms on an unweighted basis, which is just how many ranked analysts do you have. And number two among all firms on a weighted basis, which gives higher accord or higher value to higher ranked analysts. We also have the second-highest number of number one ranked analysts behind JPMorgan, with 11 analysts achieving the number one rank in their sectors.
We are committed to providing our clients with world-class independent research and we believe this intellectual capital strengthens our ability to serve our corporate, institutional and high net worth clients globally. And our Wealth Management team, again, steadily grew revenues and assets under management. Assets under management from our consolidated Investment Management businesses were $9.9 billion at the end of the quarter, up more than 10% from this time a year ago.
Let me now turn to our quarterly financial results. As we have discussed consistently in the past, our results in any given quarter are significantly affected by the timing of transaction closings, something over which we ultimately have no control. In the first quarter, we pointed this out, as our very strong results were positively affected by a higher number than expected of transaction closings. In the third quarter of this year, we have experienced the opposite effect. Notwithstanding lower advisory revenues in the third quarter, our backlogs remain strong and we remain confident in our ability to continue to grow our market share of advisory fees in the coming quarters.
With that as a background, third quarter 2018 net revenues were $376 million down 7% versus the third quarter record revenues that we had last year. Revenues for the nine months were $1.3 billion, up 10% from last year. Advisory fees were $296.3 million in the quarter down 9% year-over-year. Advisory fees exceeded $1 billion in the first nine months, the first time that we have achieved this in our history, and nine months advisory revenues were 11% above the same period last year.
ECM continued its momentum with $11.3 million of revenue in the quarter and $58.9 million year-to-date, up 95% from the first nine months of 2017. Notably, ECM sector coverage, while most active in healthcare, is continuing to broaden. Our teams are working diligently to complete our announced advisory and underwriting engagements, while at the same time building a strong backlog for 2019.
Commissions and related fees were $45.3 million, essentially flat versus the third quarter of 2017. Year-to-date commissions were $139.4 million, down 6% from the same period last year. We continue to engage actively with clients as they reassess how they consume and pay for research, and we are adjusting our service delivery and operations appropriately.
In Investment Management, asset management and administration fees and assets under management from our consolidated businesses increased 13% and 10%, respectively, versus the prior-year period and are up 14% and 10% for the year-to-date period when revenues related to the divested Institutional Trust and Independent Fiduciary business are excluded.
Net income was $62.8 million for the quarter and earnings per share was $1.23, up 3% and 1%, respectively, versus the third quarter of last year. The operating margin for the quarter was 23.1%. Net income for the first nine months was $259.7 million and earnings per share was $5.13, up 31% and 32%, respectively, versus the nine months of 2017.
Our operating margin for the first nine months was 25.6% compared to 25.2% for the first nine months of 2017. Our compensation ratio remains at 59% for the quarter. Non-compensation costs for the quarter were $67.3 million, up 9% versus the year-ago period, primarily due to increased head count and increased occupancy costs with the expansion of our headquarters in New York. Non-compensation costs for the nine-month period were $197.6 million, up 8% versus the prior year.
Let me now turn the call over to John to discuss the current market environment and to comment further on our Investment Banking business.
Thank you, Ralph. Turning to market conditions, with continued low interest rates, generally high equity prices, broadly accommodative credit markets, and a growing economy and strong business confidence, all the elements remain in place for a healthy M&A environment. Focusing on transactions in the $1 billion to $10 billion range in the first nine months of 2018, global announced volume increased approximately 24% driven by an increase of 35% in announced U.S. M&A volumes and a 17% increase in European M&A volumes. Corresponding deal count increased 20% globally, driven by a 30% year-over-year increase in Europe and a 15% year-over-year increase in the United States. Overall, this is a solid environment and we continue to have active dialogues with our clients.
Activism also remained elevated this year. Assets under management controlled by activist have remained high this quarter. Activity levels are strong both in the U.S. and in Europe. Equity issuance was strong in the first nine months of the year, with total volumes of $211 billion and it is expected to surpass 2017 volumes. Year-to-date, the IPO market raised $42 billion of proceeds and approximately 54% increase from the prior-year period and the highest level of IPO activity since 2014. U.S. equity trading volumes continued to decline in the first nine months of 2018. This trend, coupled with further reductions in research budgets, is resulting in commission pressure for the sell-side.
Let me briefly review our Investment Banking business. The composition of advisory revenues for the quarter remained diverse and reflected contributions from multiple sectors and capabilities, including financial, healthcare, TMT, activism, and capital advisory. As is normally the case, we have reasonable visibility into the fourth quarter and our pipeline for Q1 continues to grow, however the timing of deal closings, as always, is not in our control. As Ralph mentioned, ECM experienced continued momentum, and on a latest 12 months basis, underwriting revenues were $73.4 million. While we are still active in healthcare, we are broadening our sector reach particularly in energy, real estate and transportation sectors.
During the quarter, we participated in 12 transactions with 6 of 11 equity deals as a bookrunner. Notably, we completed our largest bookrun IPO to date, the $1.7 billion IPO for Elanco Animal Health. Our debt advisory and restructuring teams remain active, continuing to focus on refinancings, liability management, and debt capital advisory globally.
Our recruiting efforts have been successful this year with seven senior managing directors joining us to date. We expect to announce new additions to our advisory and equities teams in the coming weeks and are in discussions with additional talented candidates who we hope will begin to build our 2019 recruiting class. We ended the quarter with 97 advisory senior managing directors. Productivity for our advisory senior managing directors continues to be market leading.
Let me now turn the call to Bob to discuss our GAAP results and other financial matters.
Thank you, John. Beginning with our GAAP results, net revenues, net income and EPS on a GAAP basis of $1.3 billion, $213.9 million and $4.70, respectively, were a record for the year-to-date period just as they were a record on an adjusted basis. For the third quarter, net revenues, net income and earnings per share on a GAAP basis were $381.3 million, $49.5 million and $1.08, respectively.
As noted in the earnings release, we adopted the new revenue recognition guidance under ASC 606 on January 1 of this year. Following adoption, we now review open transactions at period end which we anticipate are near closing to determine whether, as of period end, all material conditions for closing have been met and it would have been probable that a significant reversal of any revenue recognized for those transactions would not occur in a future period. During the third quarter, we recognized $50.8 million of advisory fees as variable consideration that would not have been included in the third quarter under prior revenue recognition guidance.
Consistent with prior periods, our adjusted results for the quarter exclude certain items that principally relate to our acquisitions and dispositions, and also include the full share count associated with those acquisitions. Specifically, we adjusted for costs associated with the vesting of Class J LP Units granted in conjunction with the ISI acquisition. For the quarter, we expensed $3.8 million related to the Class J LP Units. Our adjusted results for the quarter also exclude special charges of $1 million related to severance paid to employees and related charges from our Mexico operations, and $1 million related to accelerated depreciation of leasehold improvements in our New York headquarters.
Moving on to non-compensation costs. Our firm-wide non-compensation costs per employee were $37,700 for the quarter, 2% lower sequentially and 1% higher on a year-over-year basis, principally due to the higher rent associated with our headquarters expansion in New York as we outlined last quarter. Our GAAP tax rate for the quarter was 22.8% as compared to 23.8% in the prior quarter and 32.4% in the same period last year. The rate for the third quarter of 2018 as well as the rate for the prior quarter was impacted by the enactment of the Tax Cuts and Jobs Act, which resulted in a decrease in income tax rates in the U.S. in 2018 and in future years. This resulted in a decrease of 12 percentage points in our U.S. GAAP and 14 percentage points in our adjusted effective tax rates for the quarter.
Turning to the share count, our Q3 share count for adjusted earnings per share was 50.9 million shares, higher in comparison with the prior quarter, driven principally by a higher share price offset by share repurchases. On a GAAP basis, the share count was 45.9 million shares for the quarter. Year-to-date, we returned $251.9 million to shareholders through dividends and share repurchases, including a quarterly dividend of $0.50 per share and repurchases of 1.9 million shares or units at an average price of $98.20.
We remain committed to our long-term capital return strategy, offsetting the potential dilution from annual bonus awards and investments in new hires over time while returning a meaningful portion of earnings as dividends. As of the end of this quarter, we have repurchased sufficient shares to offset shares issued both for year-end 2017 bonuses and for 2018 new hires. In accordance with our updated schedule, we will review our dividend policy in the first quarter of 2019.
Finally, our cash position remains strong as it customarily does at this time of year to account for future cash bonuses. And we also have funds earmarked for facilities expansion and improvements, regulatory compliance, and overall operating requirements. This level of liquidity also allows us to be opportunistic around further stock buybacks during the remainder of the year. We hold $736.3 million of cash and marketable securities at September 30, with current assets exceeding current liabilities by approximately $624 million.
Operator, we'll now open the line for questions.
Thank you, sir. We will now begin the question-and-answer session. Our first question is from the line of Brennan Hawken with UBS.
Good morning, guys. Thanks for taking the question. Bob, so – thanks for flagging the accounting change impact. I would assume that when you guys pull forward the revenue that would mean you would pull forward corresponding and relating comp for matching purposes, but just wanted to confirm if that assumption is right.
Yes. The comp ratios stayed the same at 59%.
Perfect. And then, when we think about the expense base for you all here, about what portion – is there a decent rule of thumb as far as how much would be fixed versus variable, just when we're thinking about operating leverage?
There isn't a reliable rule of thumb. I think if you look at the composition, some of it is obvious like rent. For us, as we've said many times, the more important metric is our cost per employee, because that's what is driving our cost base, and again, that was and has remained for quite some time essentially flat.
Okay. All right. And then last one for me. You guys made the comments on the strength of your pipeline and we can certainly see that the public pipeline is very, very strong. And then I'm sure – I think your comment was on backlog, so that means it's even beyond just what we folks can see publicly. But when we look at what's happening in the equity markets and the volatility and the rather significant pullbacks that we've seen, if those proved to be sustainable, how do you think about adjustments and applying some sort of risk haircut to the backlog? And how should we think about that and how much risk really is there for deals when you end up seeing volatility of this sort should it proved to be sustainable?
Yeah. Let me respond to that with a couple of comments. First of all, our backlogs were strong at the chronological end of the third quarter. And obviously as you commented, Brennan, GAAP required us to effectively pull forward part of that backlog into the third quarter and recognize it there. Our backlogs today, notwithstanding that, are equally strong. So, we feel in a very strong position.
With respect to the volatility that we've experienced over the last couple weeks, three weeks, I would make a couple comments. First of all, during the period of healthy M&A activity, which we've experienced over a number of years now, there have been a handful of periods of volatility and if you remember, precipitated by Brexit, precipitated by difficulties with the budget, precipitated by what was affectionately referred to as the taper tantrum. And each of those caused some volatility in the markets perhaps caused a momentary hesitation on the part of leaders of businesses, but none of them affected the overall level of activity. Obviously, if we had a protracted downturn in the equity markets and a protracted widening of spreads in the debt markets that would have some effect on activity. But as of today, we see absolutely none of that.
Okay. Well – oh, sorry. Please go ahead.
I would just add to that, that even though the markets have been volatile, I would say that the conversations really in our pipeline with our clients is that, broadly, they think deals are financeable. And in addition I think that as I look in general out, they see the economic activity continues to be quite strong. And so, I think that at least right now, we don't really see any change in how people are thinking about strategic activity.
Okay. Thanks. Thanks for that color, John and Ralph. I appreciate that. One of the things that I think has got some investors' attention and maybe if you could just as a follow-up touch on is that, there was expectation that coming off of the summer, seasonally calm summertime, we would see a big pickup in September, and that would get us back to this recent pace we've been running at, a global announced, and there just wasn't quite that follow through, while there have been – there has certainly remains activity and it remains okay, it's not quite at the pace that it was before. I'm guessing from your comments that you would just chalk that up to month-to-month fluctuations. But is that true or is there anything more than that going on or are folks maybe holding back a bit to see how some of this stuff works out? What would you say about that?
We would chalk that up as you suggested to month-to-month vacillations and we haven't seen any kind of systemic trend at this point in time. And the one other thing I would add Brennan is that, look, obviously, our business like everyone who is in the advisory business is affected by the perceived and actual ups and downs of advisory revenue. But I think it's a mistake for investors to ignore what's going on in terms of market share within that fee pool.
And if one goes back to the period 2010 to 2013, advisory – or M&A announcements were – they looked like a lake. There were I think four years in a row where aggregate dollar volume of M&A activity announced was between $2.1 trillion and $2.3 trillion, four years in a row. Yet, we were able to grow our advisory revenues by mid-double-digits, not because the pie was expanding, but because our slice of the pie was growing. That has continued through the period of 2014 through the three quarters of this year when M&A activity has been quite a bit higher than that $2.2 trillion, and here again, we've gained market share throughout that period of time. So, it's certainly our expectation and our backlogs would suggest that that will continue to happen. So, that's the reason we feel reasonably good about our business.
Okay, great. Thanks for all that color.
Thank you. Our next question is from the line of Jim Mitchell of Buckingham Research.
Good morning. Maybe just talk a little bit about private equity activity, it seems like most of the deals over the last couple of years has been strategic-driven. We're starting – it looks like to see some pickup in activity with private equity firms, but still sitting on a lot of cash. What's your sense in talking to that client base? Do you see that as an opportunity for growth over the next 12 to 24 months? How do you think about the activity levels there?
Well, we continue very, very strong dialogues with the private equity groups. There is no question that there is an accumulation of capital there just waiting to go to work. And I think that most of the private equity people are watching the market very carefully and watching price levels hoping that price levels come down to the point where it's going to make a lot of sense for them to pile in. I think our dialogues with them don't really change that much, but we do see that they are very, very watchful as to levels and looking for deals. And one of the things I think you have to say though and see is that when the prices do come down, there will be quite a bit of competition, because there is a lot of money that wants to go to work. Having said that, I think as we look out, we feel really good about the activity levels with private equity firms and our dialogues continue and relationships continue to be very strong.
And you don't see them sort of being a little bit concerned about the macro potential slowdown? I mean, we've heard a little bit of that that maybe worried about how do you build in recessionary view into your modeling of how you buy it, you think price coming down is actually stimulative, not a concern for the PE firms?
Yeah. It kind of go both – as you know, it goes both ways. On the one hand, they look at recession and they try and judge how various businesses will be able to perform versus recession. On the other hand, the prices, the price levels of equities have been quite high and a lot of them have kind of said, let's wait on the sidelines till things come down. So, it's a balance, and I think that what you'll see is, different firms having a different point of view on the environment as well as various businesses, abilities to perform under different economic conditions, and what they can do operationally in those businesses.
By the way, I don't know a single business or business leader who doesn't do contingency planning for less than good environments, and public equity firms are no different from anybody else in that respect.
No. That makes sense and that's helpful. Maybe for Bob, you talked about being opportunistic on the buyback. Can you just remind us at this point, what the authorization you have remaining? And if there's any kind of trigger point in terms of the stock price or how you think about whether you get more aggressive on buybacks, how do you go through that thought process?
Jim, I don't have the specifics of the authorization remaining, because it's a lot and not a constraint. Someone could get that for you if it were important.
Well, I think a year ago, it's $750 million, right?
Yeah. So, we bought a bit, but there's a lot left. Look, you know our philosophy on buybacks. We want to offset the dilution from our bonuses and from our new SMD hires. And other than keeping some cash in our business to further drive growth, I said small building project going on and growing some capital as we grow the business globally, we return the rest through dividends and buybacks. So, in the current environment, we've accomplished the baseline. We've offset all the dilution from new hires and bonuses, and therein, we'll be opportunistic in the market.
Yeah. And I would just add that – and this is just plain math that anybody could do, we've earned $5.13 in the first nine months of the year. I don't remember exactly what our earnings were in the fourth quarter, but I think they were $2-something, $2.20-something. So, our trailing 12 months EPS is in the $7.40 range, that's we're trading at 12 times less trailing 12 months. Earnings in a company that's growing at mid-teens historically, and that returns, as Bob indicated, 100% of its free cash flow to its shareholders. That's a pretty decent investment from my point of view.
Okay. Thanks. Appreciate it.
Thank you. Our next question is from the line of Devin Ryan with JMP Securities.
Thanks. Good morning, guys.
Good morning.
Good morning.
So, first question here just on the environment. So, the strategic reasons to do deals right now seem very powerful, whether it be technological change, tax reform as a catalyst, global dynamics or just the search for growth. And so, you guys have lived through some cycles here. And so, wanted to get some perspective. Each cycle always seems to be driven by different factors. But how would you characterize the strategic importance of M&A today to your corporate clients as they're thinking about kind of their strategic priorities relative to prior cycles, and just kind of thinking about that question to maybe give us some perspective of the breadth of this cycle?
Well, I'll start. Obviously, this is a very subjective question. I'd say that, in general, the world is changing and change is accelerating. And one of the things that I think that some of the very enlightened managements are thinking about, and really a lot of our clients talk about all the time and on the board level we see is that everybody is trying to figure out how to continue to create value for shareholders and that can come in many forms. It can come in how you operate your company but it also, to a very large extent, comes how can you think strategically about expanding your business and growing your business.
I think my point of view and what we see is that there are many, many enlightened management teams who are trying to think expansively about how they can keep their business changing and growing. And as you said, you very, very well put that there's a lot of things that are pushing change and also pushing growth, whether that's technology and the development of technology, whether it's the expansion into markets and how people are dealing with those markets. So, I think generally we look at the environment and the broader longer-term environment, feel very positive about the M&A business and how companies will think about growing strategically through M&A.
Yeah. The only thing I would add is that I consider us very fortunate that we're in a – our largest business by far is a secular growth business. If you look back over 40 years, M&A activity is highly correlated to the total market cap of global equities and to nominal GDP. Fortunately, for the world, those things have been growing pretty steadily. Obviously, we had recessions and market setbacks, but there's certainly an upward bias to those over a long period of time. So, that's a really good thing for our business.
And the things that you and John talked about tend to affect whether activity is a little above the average line or a little below the average line. And the more change you have, whether it's technological change or supply chain change or things of that nature, that tends to stimulate rethinking on the part of managements and activity. And we happen to be in a period of time where certainly those sorts of things, as both you and John suggested, are at a minimum sort of average. And I would argue, certainly in the technology area, they're above average.
Got it. Very helpful. And then, this one may be a little bit difficult, but if you go back three or four years, back to 2013, you've more than doubled your advisory revenues. And I remember at that time, the path that you laid out to effectively doubling revenues, and you guys did it even faster, I think, than what was in that path. And so, we're talking about there's a secular growth element within the business and that's very powerful, but then there's also the ability to take market share and add new sleeves of capabilities.
And so, as we sit here today, because this is a question that I get, how do we think about the next doubling, if you will, or that next stair step higher in growth? And obviously, there's going to be the secular benefits over time that help the firm, but is there enough white space to call it double bankers again opportunistically in this type of environment and really ask the question against all the success that you've already had?
Sure. So, I used to glibly respond when people asked how large could Evercore get in the advisory business that our largest competitor one year did $1.4 billion in advisory revenues, our largest independent firm competitor. So, I knew that could be achieved. Well, now we're there. And the reality is we see quite a bit of, to use your term, white space which offers considerable opportunities for growth.
So, first of all, in just a pure sectoral point of view, as you've seen over the last year, we've made some very significant hires both in the industrial sector and the consumer sector. And those happen to be two of the six sectors where 10% or more of the advisory fee pool is generated. Those were sectors that we didn't have anything close to market-leading capabilities and we now do, but we're in the early innings of those. So, I would expect that our market share in those sectors would grow.
There are a not small number of subsectors, which I'm not going to iterate, that offer similar opportunities that are white space for us. The second area is geographic. Obviously, our two largest independent firm competitors, all three of us have roughly the same advisory revenues. They have, by virtue of their birth and their success there, much bigger businesses in Europe than we do, and that's certainly an important focus of the firm over the next two to three to five years.
And then finally, the capabilities with which we serve our clients. I frequently say to senior managing directors that we're recruiting that if they're inclining to go to an independent firm that they can feel assured that they can do more business with their clients at Evercore than they can at any other independent firm. I honestly believe that's a tautological statement, because we have – first of all, we've an equity underwriting business which no other independent firm has, we have a market-leading practice in activism which is not equal by any of the other independent firms, and our equity capital markets and debt capital markets advisory practices are comparable to others, and we expect those to continue to grow.
So, sitting here today, I couldn't possibly tell you where I think the opportunities tap out for us or whether they tap out. But certainly, sitting here today, John and I and Roger and the rest of the leadership team here are pretty excited about the opportunities going forward for this company.
That's great color. Thank you, Ralph. Real quick model question for Bob, just on the revenue recognition accounting. Just how far into the next period could deals effectively meet that criteria, just trying to think about going forward? And then, were all the fees, the $50 million this period, just in M&A advisory?
It's facts and circumstances. It's a case by case decision, Devin. So, I think any one of us would intuit that the further you get into the quarter, the less likely it is. But you can't and shouldn't draw a line around when probability might or might not occur in terms of closing it or not recognize the revenue. And look, the fees were in several areas within our advisory businesses.
Great. Thank you.
Thank you. Our next question is from the line of Steven Chubak with Wolfe Research. Your line is now open.
Hi. Good morning.
Good morning.
So, I wanted to ask about some of the ancillary or nontraditional M&A businesses. The contribution from these areas whether it's private capital advisory, funds placements, it's been quite meaningful. You've done a really nice job in recent years scaling those businesses, expanding those capabilities. You spent a lot of time talking about the drivers of M&A in this call, both John and Ralph, and I'm just wondering if you can give us some perspective on the outlook for those businesses, given some of the recent volatility we've seen as well as the fact that's become a much bigger contributor to your overall revenue base.
I would say capital raising generally, whether it's the two businesses that you specifically referred to or capital raising for more traditional capital raising debt or equity, has become a growing part of our business. It's certainly not the dominant part of our business, but it has a growth rate both by virtue of opportunity set and market share gains, that is strong and certainly competitive with our M&A activity. I think we've invested pretty heavily in those capabilities and I think they really accomplish two things for us. One is the one that you referred to is that they provide additional alternative – if somebody could mute their line, we're hearing a lot of crinkling. Thank you.
Oh, sorry about that.
That's all right. They provide an additional – I hope it wasn't candy that you were unwrapping.
Sadly, no.
They provide an additional source of revenue which has been growing year in and year out for us. The second thing that they do that may not be as broadly recognized is that they provide us with the skill set to be the lead advisor or sole advisor for a longer period of time than would have been the case of the Evercore five years ago.
So, there are many examples, none of which I'm going to go through specifically on this call, where we have either been the sole advisor all the way through and help our client with negotiating the financing for a transaction or where we have given them very strong views on how the market – equity market might react to different structures. And those have allowed us to be in a lead role or a sole role in certain M&A transactions, which of course affects our share of the fee on that transaction sometimes 100%, but sometimes disproportionately in our favor. So, both of those effects are happening in our view.
The only other thing that I'd like to add to that is that each of these areas is performing at a very, very high level, in many cases, best-in-class in our opinion. And one of the things which you'll appreciate as a medium-sized and growing firm is that, every time we do something very well, we add to our reputation for excellence and capability. And we think those areas are really helping us with how – what we can offer to clients and really the performance that we're able to exhibit when we're addressing client issues and problems and challenges. And so, we think that those areas are actually somewhat catalytic in terms of what we're trying to accomplish in terms of our brand, our reputation, and our capability.
Yeah. Thanks for providing all that helpful color. Maybe just one follow-up for me on MiFID, Ralph, looking at the press release, it's interesting to note that you did mention that you're focused on ensuring that you receive appropriate levels of compensation for the research that you're providing and it was also encouraging just to see some of the more muted commission pressures that we saw in the quarter. I'm just wondering if we should interpret your remarks as signaling some level of potential revenue support at these levels. And just if you can give us some color on how your dialogue has been with U.S. and European clients?
Yeah. I'm going to make pretty much the same comment I've made in the last two earnings calls and that is that, obviously, we're very focused on this in the broadest sense, MiFID is clearly going to have some negative effect on the overall people who are research-based businesses. On the other hand, I think it's equally probable or likely that the highest quality research will gain market share. I really believe it's – we're in the early innings and it's really too early to say, I believe, it's going to be a year or two before we know precisely what – how this all shakes out. But I think if you look at the quarter-to-quarter comps over the last three quarters, the first quarter, I think we were – commissions and checks were down about 13%; the second quarter, they were down 5% or 6%; and this quarter, they were flat. I guess, we take some encouragements from that, but we're certainly not running around the field doing victory laps.
Understood. All right. Thank you, both, for taking my questions.
Sure.
Our next question is from the line of Mike Needham of Bank of America Merrill Lynch.
Hey. Good morning, everyone. The first question I have is on Europe. Can you give us an update there? You hired a senior industrials banker I think in Germany recently. And earlier in the call, you noted that market is kind of – not just Germany, but Europe is kind of dominated by big banks and the two independent firms. So, how receptive has talent been to leaving those firms?
I would say more receptive today than ever, and we'll see how that ultimately affects our hiring path there. We have another hire that we haven't yet announced, so – which will mean that we will hire a total of eight SMDs this year in our advisory business, including of course, the real estate capital advisory team that we hired earlier this year. So, we're certainly encouraged by the quality of people that we are in discussion with right now and have been over the last six to nine months, but obviously, the proof is in the execution.
Yeah. And I think what we're watching carefully is we're definitely watching to make sure that as we move forward and continue to hire that we keep up the quality of our organization. And as Ralph said, we are definitely finding that people very much want to talk to us. And so, those are very good conversations. And as we move forward here, we think we have opportunity to continue to grow and add people.
Yeah. I would just add one thing, and it's true of Europe and it's true of the U.S., that I think it does drive the market share gains. There is an increasing appreciation on the part of corporates, and I would add PE firms as well, of the contribution that can be made by organizations and people who bring differentiated intellectual content and differentiated relationships. And I would argue the overall independent advisory firms have taken market share and Evercore has taken market share among those firms, because we do believe we have leading intellectual capital and relationships here, which we believe is validated by the productivity of our senior managing directors.
Interestingly enough, Europe is a market where the independent firms have always had a significant share of the marketplace. Lazard and Rothschild have always been very successful there and their businesses go back 160-some years and 200 years, respectively. And there have been any number of what probably we would refer to as kiosks that have popped up there, who have had their own success, which I think is indicative of a market that is receptive to our business model. So, it's really about continuing to add talent there that is of the highest quality, as John suggested.
Okay. Got it. Thank you. And just one more follow-up on the hiring topic, I think you mentioned adding people to the equities business, so new adds are pending. The revenue environment is a little bit difficult. Are those adds focused on continuing to expand your ECM revenue and how are you going to make sure that these new hires are earnings accretive? Thanks.
Well, I think, obviously, we are in a unique position among the independent research firms in that we have both an equity underwriting revenue stream and a commissions and checks revenue stream. And the hires that we make are obviously designed to be additive to revenues in one or both of those.
Okay, great. Thank you.
Our next question is from the line of Jeff Harte with Sandler O'Neill.
Good morning, guys. Just a couple left for me. One, you mentioned earlier contingency planning and expanding the MD count has really driven strong revenue growth for you guys over the years, but that also comes with some expenses. Can you talk a bit about how you think of recruiting and hiring intentions if the M&A cycle actually slows down, which I don't think it will, but plenty of people seem to?
Yeah. Well, look, I think we have a long-term strategic orientation of growing our market share by adding the most talented people to our business. To the extent that we have thought about what will we do in a downturn and, obviously, we always think about that and we – the one thing we know that downturns are like snowflakes. Every one is different. So, you'd be foolish to have a specific plan.
But one of the principles that we have articulated to ourselves and to our team here internally is that our goal would be to add talent when the inevitable downturn does occur, so that we come out of that in a stronger position from a market share point of view. Obviously, we have to balance the needs of continuing to deliver good earnings to our shareholders, which hopefully you feel we're very cognizant of. But I would not expect that when there is some weakness that Evercore is going to be a firm that's going to crawl up in a ball and just watch two or three years of pain.
Said maybe slightly differently, but same way thematically, as we hire people, we're not hiring people to add volume. We're really hiring people to add capability and the opportunity to serve clients. And so, the people that we're hiring now at this point of the cycle, are people that we think are excellent and are very much long-term for our franchise. And so, from a secular perspective, those people are going to allow us to perform very well through the cycle and out.
Okay. Thanks. And Europe has come up a few times. I guess, when I think of Europe for you guys, I tend to think of it being more of a UK-heavy franchise historically with kind of the opportunity to grow on the continent, and it seems to be where your growth efforts at least recently have been. How much more competitive and/or difficult are you finding continental Europe to penetrate?
Well, there is no part of our business that isn't competitive and difficult. So, let's just establish that as a fact. But here again, it really does come down to – the quality of brand is important, and obviously, our brand has grown over the last few years. But you need to have the right people on the ground in the right places to be successful. And I think we've articulated this in the past on this call that Evercore's approach to hiring is really simple. We have white space, to use the term someone else used on this call. We're constantly looking for people to fill that white space, but if we can't hire an A+ or an A, we wait.
So, we have a whole bunch of obvious holes in Europe, geographic and industry, and it doesn't take a genius to figure out what those are and we're constantly looking for talent to fill those. But if we can't find someone – unlike a lot of large firms where they say, we have to have this sector, we have to have that sector, that is not our approach. Our approach is if we can't hire someone who we believe and they believe can produce revenue comparable to our metrics, we'll wait. And it's frustrating especially when deals go by in sectors that you don't have relationships or capabilities, but in the long run, it's the right way to build a great firm.
Okay. Thank you.
Thank you. There appear to be no questions at this time. I would now like to turn the floor to Ralph Schlosstein for closing remarks.
Thanks very much, everyone, for your time and attention. And we very much look forward to talking to you in January talking about the entirety of 2018.
This concludes today's Evercore third quarter and nine months 2018 financial results conference call. You may now disconnect.