Evercore Inc
NYSE:EVR
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Evercore Inc
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Good morning and thank you for standing by. Welcome to Evercore’s Third Quarter 2021 Financial Results Conference Call. During today’s call, all parties will be in listen-only mode. Following the presentation, the conference call will open up for questions. [Operator Instructions] As a reminder this conference call is being recorded today, Wednesday, October 27, 2021.
I would now like to turn the conference over to your host, Evercore’s Head of Investor Relations, Hallie Miller. Please go ahead.
Thank you, Ian, and good morning, everyone. Thank you for joining us today for Evercore’s third quarter 2021 financial results conference call. I’m Hallie Miller, Evercore’s Head of Investor Relations, and joining me today on the call are John Weinberg and Ralph Schlosstein, our Co-Chairmen and Co-CEOs; and Celeste Mellet, our CFO. After our prepared remarks, we will open up the line for questions.
Earlier today, we issued a press release announcing Evercore’s third quarter 2021 financial results. A discussion of our results today is complementary to the press release, which is available on our website at evercore.com. This conference call is being webcast live in the For Investors section of our website, and an archive of it will be available for 30 days, beginning approximately one hour after the conclusion of this call.
During the course of this conference call, we may make a number of forward-looking statements. Any forward-looking statements that we make 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 SEC, 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 is posted on our website.
We continue to believe that it is important to evaluate Evercore’s performance on an annual basis. As we have noted previously, our results for any particular quarter are influenced by the timing of transaction closings.
I’ll now turn the call over to John.
Thank you, Hallie, and good morning, everyone.
Let me begin by expressing my affection and respect for Ralph. He’s been an outstanding leader, partner and friend. I will have a lot more to say about Ralph at the end of our comments, but first, let’s talk about the quarter.
The positive environment for M&A and capital raising experienced during the first half of the year extended into the third quarter. Our results reflect this momentum and the success of our strategic initiatives aimed at broadening and diversifying our platform. The strength and depth of our talented teams, coupled with our broad and expanding platform of capabilities provides us with the tools and intellectual capital to advise our clients on their most important strategic capital and financial needs.
Dollar volume of announced M&A globally was more than $1.5 trillion in the third quarter, representing a 9% sequential increase. It was also the 5th straight quarter that announced M&A activity surpassed $1 trillion. Strong economic conditions and thematic trends around growth and technological disruption continue to drive activity. The ongoing high level of activity has positively affected our results and it has sustained our backlogs as well. Our forward-looking indicators, risks and unrisk backlogs, engagement letters and conflict checks, which are the most forward-looking are all strong.
Activist activity remains high with a 23% year-over-year increase in the number of new activist positions in the last 12 months. Activists continue to drive M&A-related activity to seek broad -- and to seek broad representation. Equity issuance continues to outpace historical levels with a greater total amount raised year-to-date than any year other than 2020 and larger than 2019 and 2018 combined. Levels have stabilized somewhat from earlier in the year when SPAC underwriting activity was substantial.
In the private capital advisory space, momentum in capital raising for financial sponsors continues and secondary market activity remains high, particularly activity related to single asset structures. The strong availability of credit and the pace of economic recovery has limited the need for traditional restructuring work, though leverage remains elevated. There continue to be opportunities for bespoke financings and assignments with financial sponsors and creditors. In Equities, despite the usual third quarter seasonality, we benefited from heightened volatility at the end of the quarter and our expanded offering set for clients.
In summary, with the backdrop of a strong economic environment, our business continues to perform exceptionally well. Our teams are busy helping clients, and we are pleased to have the majority of our workforce back in the office in some form.
We do not see anything that would indicate an imminent pullback in the momentum. But, we continue to monitor inflation, Fed actions, interest rates, the regulatory environment, supply chain disruption and COVID’s impact on the reopening process. Of course, our results are always affected by the timing of deal closings.
With that, let me turn to key business highlights from the quarter. We ranked number one in the Refinitiv league tables for dollar volume of announced M&A both globally and in the U.S. among independent firms for the latest 12-month period, and we ranked 7 among all firms in the U.S. for the same period.
Celeste will discuss our financials in more detail later in the call. However, I would like to highlight that we achieved a four straight quarter of advisory revenues greater than $500 million and our year-to-date advisory revenues of $1.78 billion are more than all of 2020, which was a record year for us.
Based on current consensus estimates and actual results, we expect to maintain our number four ranking based on advisory fees among all publicly traded investment banking firms over the last 12 months and to grow our market share relative to these same firms. We are working on several of the top 25 announced global M&A transactions this year, including advising GE Capital Aviation on its pending $30 billion sale to AerCap Holdings, advising the Board of Directors of Canadian Pacific on its pending $29 billion acquisition of Kansas City Southern, serving as the lead advisor to Grab on its $40 billion SPAC merger, serving as the sole advisor to Nuance on its pending $19.7 billion sale to Microsoft and advising MGM Growth Properties on its $17.2 billion sale to VICI Properties.
Our underwriting business had another solid quarter, booking more than $50 million in revenues, and the pipeline for activity remains strong. It’s clear that further investment in our ECM business, including building out our sector coverage and enhancing our capabilities with convertibles is contributing meaningfully to the growth of this business and the firm overall.
We continue to achieve increasingly better leadership positions in the ECM transactions in which we participate. We served as active bookrunner on approximately 60% and of the 24 equity deals and equity-linked deals we completed during the quarter.
We continue to diversify the mix of our revenues. While health care still makes up the bulk of our underwriting revenues, we are seeing more variety within the health care sector beyond biotech as well as greater contribution from sectors such as TMT, industrials and consumer, which in aggregate more than tripled their share of ECM revenues in the third quarter compared to this time last year.
A few notable transactions from the quarter include, in pharma, active bookrunner on Ascendas Pharmacy’s $460 million follow-on offering, in consumer passive bookrunner on Olaplex’s $1.8 billion IPO, and TMT passive bookrunner on Bumble’s $1.1 billion follow-on offering; in consumer, we were a financial advisor to Warby Parker for its direct listing.
Even with the slowdown in the market for SPAC underwriting, we completed five during the quarter, including three as lead-left bookrunner. We once again ranked in the top 20 for underwriting revenue as estimated by Dealogic for the latest 12-month period for deals listed on the U.S. exchanges, excluding bought deals and ATMs. We remain focused on working our way towards the top 10 for the market share.
Our work with financial sponsors in our private capital advisory groups, our secondary advisory business and our primary fundraising business continue at a strong pace. These businesses continue to show significant momentum and their impact on our results continues to grow. Our success here is driven by three things: first, our strong client relationships; second, our strong track record; and third, our comprehensive coverage approach, which includes sale of assets, LP positions and GP stakes, and our capability in raising capital.
As I commented, our momentum continues to build as many of our clients are repeat clients, and our reputation attracts more opportunities. The breadth and interconnectivity of our platforms means that we can work with financial sponsors on the fundraising side, then work with them on the advisory side as they deploy capital, which can then lead to the next fundraise.
In restructuring, the strong economic recovery and access to capital is enabling companies to restructure out of court. Our team continues to work through prior assignments, liability management engagements and creditor assignments and continues to partner with our debt advisory team in private financing activity.
In equities, we remain engaged with our clients and focused on producing and delivering high-quality research and service for them. Clients continue to use our excellent research and value the service we provide them through our core product. Independent third-party data indicates that while the market wallet declined in the second quarter, both sequentially and year-over-year, we successfully increased our market share versus both prior periods. In fact, we were the largest share gainer of any firm globally transacting in U.S. cash equities.
We are extremely proud that Evercore ISI was once again highly ranked in Institutional Investor’s All-America Research Survey. Highlights include top-ranked independent research firm for the eighth straight year, number two ranked firm among all firms for analysts, record 43 individual positions and 40 team positions, and Ed Hyman was awarded the number one position in economics for the 41st time.
The convertibles business that we added a year ago continues to gain momentum as we build out the team and integrate it with our capabilities in research and sales. Finally, AUM in our wealth management business finished the quarter at $11.3 billion as long-term performance remains solid and new business continues to be positive.
Let me now turn the call over to Ralph to discuss some of our priorities going forward, including our initiatives focused on long-term growth and return of capital to shareholders.
Thanks so much, John.
Before I get into a discussion of our growth opportunities and our return of capital approach, I want to acknowledge this morning’s announcement that after nearly 13 years at the helm of Evercore, I will be stepping down at the end of February from my role as Co-Chairman of the Board and Co-CEO. John and I will remain in our current roles until then, at which time, he will become the sole Chairman and CEO of Evercore, and I will become Chairman Emeritus. I will have more to say about my almost 13 years here on my last earnings call in early February. But, I want to say that John and I have been partners in running Evercore for the last 5 years, for the first 3.5 years with John as Executive Chairman and I as CEO and for the last 15 months, as Co-Chairman of the Board and Co-CEOs. It has been a great partnership.
When I convinced John to unretire 5 years ago, and it took me 18 months to convince him, it was my depot that he would succeed me as CEO. Today, that hope has been fulfilled. He is beyond ready to take on this role. He’s excited about taking on this role, and I couldn’t be more optimistic about the future of the firm under his leadership.
I’m also very proud that we have put in place a next generation of leadership in almost every part of the firm. Of the four leaders of U.S. advisory, three are in their 40s. Of our two leaders of our advisory business in Europe, one is in his early 50s. Our CEO of Evercore ISI is in his early 50s. Our new CFO and our General Counsel are in their 40s. Our new Head of ECM is in her early 40s and our new Head of Evercore Wealth Management is in his early 50s.
With these extraordinarily capable young men and women in leadership positions, our firm is in a great position for the next decade or two. I’m also proud of the incredible strength of our culture, which truly has allowed us to thrive over the last 20 months and the last 12.5 years.
Our core values of clients first, excellence, integrity, teamwork, respect for each other, investment in our talent and diversity, equity and inclusion, have sustained us during this very challenging period, and they will allow us to continue to gain market share in the coming years.
Finally, let me say a word of thank you to our Founder and Senior Chairman, Roger Altman. Roger founded this firm over 27 years ago and his very first presentation to his very first prospective client had two words on the first page, quality and integrity, a very simple idea, but an incredibly powerful one from the beginning, including the naming of the firm, not incorporating his last name.
He often jokes about our Founder, Howard Evercore, who, of course, never existed. But from the beginning, he simply wanted the firm to provide high-quality honest advice to clients and to maintain the highest standards of integrity. Roger and I have worked together in four different places, and this is the first time that we’ve worked closely together. And like my partnership with John, it has been a great partnership.
Roger is a very modest man, but I don’t think he would mind me saying that he is today the single best person on the planet at what he does, and he has been a great partner to me over the last 12.5 years.
Let me now talk about our growth aspirations and our return of capital approach. Our growth aspirations have evolved over the years from our goal of achieving $1 billion in advisory revenues to becoming the largest independent investment banking advisory firm in the world, and the fourth largest in advisory fees among all firms, a goal that we first achieved in 2018 and have achieved every year since. And our goal lately is to steadily gain market share and to narrow the gap between Evercore and the top three global firms by advisory revenues, all of course -- all of whom, of course, are universal banking firms.
The breadth and diversity of our capabilities and, of course, a strong environment for M&A and capital raising have supported our growth trajectory and our industry-leading advisory SMD productivity, but we believe that we certainly have meaningful growth opportunities in both, revenues and market share gains in the future.
We have many opportunities to seize, but let me highlight three. First, we are highly focused on filling sector and geographic white space, both in North America and in Europe in our advisory business, and on continuing our client coverage initiatives focused on financial sponsors and large multinational corporations.
Second, we are deepening and broadening our product capabilities, particularly in ECM and debt advisory, including the addition of SPAC expertise and convertibles capability so that we have more fee opportunities with each of our clients and increase -- and can increase our share of fees paid by our clients.
And third, we are investing heavily in advisory capabilities that serve the fastest-growing segments of the economy, including the four techs, fintech, biotech, cleantech and traditional tech, particularly software. Hiring A+ talent and developing strong talent from within is critical to continuing to grow, and we have made notable progress on our hiring objectives this year.
Two new advisory SMDs joined us earlier this year. Kristy Grippi is our new Head of ECM, and Juan Pedro Cózar as our Head of Iberia. And they already have -- are having significant and positive impact on our business. Three additional advisory SMDs, Brad Wolff, covering biotech; Brad David, covering financial sponsors; and Adi Jayaraman, covering fintech have joined us, and we expect them to begin to have an impact soon. Three additional advisory SMDs have left their firms and will join Evercore later this year, covering the power and renewable space, and basic materials.
These SMD additions in 2021 put us at the top end of our historical range of 4 to 8 advisory SMD recruits per year. And we continue to have meaningful and ongoing conversations with other potential recruits in areas of strategic significance. Add to that the two advisory SMDs who were promoted earlier this year, and we have 10 new SMDs and advisory that are ramping up in areas of strategic importance to us.
In addition to hiring at the most senior levels, we are adding talent at all levels of seniority to continue to enhance our coverage, to meet the needs of our clients, and to support the elevated pace of activity that John described.
If we can continue to hire strong talent at all levels and offer more capabilities to serve clients, we will be able to enhance our already strong and industry-leading advisory SMD productivity levels and continue to grow the firm. And of course, there is additional inherent growth potential from the 30-plus senior managing directors, including the 10 from this year that have joined or been promoted over the past three years and are still ramping up to full productivity.
And finally, we continue to add world-class senior research analysts like Mark Mahaney, the II-ranked internet analyst, who joined us earlier this year.
Now, let me discuss our capital return approach. Our goal has always been to return to our shareholders all of our earnings not invested in the business in the form of dividends and share repurchases. We achieved this goal in aggregate over a multiyear period through 2019. And during the period 2015 to 2020, we reduced our adjusted weighted share count by 9%, a little over 2% a year. 2020, of course, was an anomalous year. We took several actions in 2020 to build a fortress balance sheet for our business.
First, in the early days of the pandemic, when there was heightened uncertainty about the length and depth of the economic slowdown, we became more conservative in our capital return policy, temporarily suspending discretionary buybacks and keeping our dividend flat for two quarters. This resulted in increased cash holdings, particularly as our business recovered toward the end of the year.
Second, we decided to become more conservative in our long-term capital management approach. In addition to what we historically held cash for, minimum capital -- working capital requirements, including capital to support our underwriting activities, accrued cash bonuses and a portion of upcoming and historical deferred compensation, we decided to prefund all of our awarded deferred cash compensation obligations, thus building a truly fortress balance sheet for our business. This catch-up was a onetime event.
Finally, we meaningfully increased the capital levels of our U.S. broker-dealer in the third quarter of 2020 to support our significantly expanded underwriting business, which, as you may recall, had two very large transactions in the second quarter and is operating at a considerably higher level with a broader array of products than it has prior to 2020.
Ultimately, because of our surprisingly fourth quarter, we ended 2020 with an excess cash position even when considering the funding of all of these capital requirements for the underwriting business and fully funding our awarded deferred compensation obligations. We also ended the first quarter of 2021 with an excess cash position. And while we have been working down our excess cash position, we still have more cash than we need to meet our fortress balance sheet requirements.
So far this year, we have returned $631.5 million to shareholders through dividends and share repurchases. We intend from this point forward to continue our pre-2020 practice of returning to shareholders all of our earnings not invested in the business and also to work down opportunistically over time our excess cash position. This will in turn shrink our adjusted diluted weighted average share count over time as we did from 2015 until now, although going forward at a more accelerated pace than the 2-plus percentage shrinkage over the last five years. It also will drive meaningful EPS growth.
Before I turn the call over to Celeste to discuss our financials, let me inject the little humor into this call. Over the last 12.5 years, all of you on this call have tried countless ways to get me to offer some forward-looking guidance. So now, on my penultimate earnings call, let me make my first and last forward-looking guidance statement. Of the first 12 years that I have been doing Evercore earnings calls, in 11 of those 12 years, we have had record revenues and earnings per share.
So, here we go. Sitting where we are today, with year-to-date revenues roughly $100 million below last year’s full year record and nine-month EPS about $0.80 above last year’s full year record, let me guide all of you by saying that 2021 will be another record year in revenues and earnings for Evercore. By the way, I got permission from our General Counsel to say that.
Celeste, let me turn it over to you.
Thank you, Ralph, and it’s really a pleasure to be here during my first -- doing my first earnings call with you and John as Evercore’s CFO. For the third quarter of 2021, net revenues, net income and EPS on a GAAP basis were $824 million, $160 million and $3.74, respectively. Year-to-date, net revenues, net income and EPS on a GAAP basis were $2.17 billion, $444 million and $10.19, respectively.
My comments from here will focus on non-GAAP measures, which we believe are useful when evaluating our results. Our standard GAAP reporting and a reconciliation of GAAP to adjusted results can be found in our press release, which is on our website.
Third quarter adjusted net revenues of $832 million grew 104% year-over-year. Year-to-date adjusted net revenues of $2.19 billion increased 62% compared to the prior year period. This represents our best third quarter ever, our second best quarter ever overall, and the first time adjusted net revenue surpassed $2 billion in the first nine months of the year.
Third quarter advisory fees of $709 million grew 161% year-over-year. Year-to-date advisory fees of $1.78 billion increased 84% versus the prior year period. Our advisory fees include approximately $93 million of revenue from transactions that closed in early October.
As a reminder, in accordance with relevant accounting principles, we recognized revenue for deals that closed early in the following quarter as certain closing conditions were satisfied at quarter-end. To compare, we recognized $59 million in the second quarter of 2021 and $20 million in the third quarter of 2020.
Third quarter underwriting fees of $54 million reflected a decline of 18% year-over-year. This compares favorably to the overall market for U.S. equity and equity-linked issuance, which declined nearly 25% year-over-year as SPAC activity slowed dramatically.
We have been selective in SPAC underwriting activity, which helps protect our revenues from experiencing volatility associated with this market. Year-to-date underwriting fees of $182 million are essentially flat versus the prior year period, which, as a reminder, included two sizable transactions in the second quarter of 2020 that totaled nearly $45 million in revenues.
Third quarter commissions and related revenue of $47 million increased 6% year-over-year, even as market volumes and volatility declined. Check collections, which are driven by research votes, were strong. Convertible securities, which we began trading in January continued to contribute positively. Year-to-date commissions and related revenue of $151 million declined 2% versus the prior year period as market volatility declined significantly.
Third quarter asset management and administration fees of $20 million increased 21% year-over-year on higher AUM. Year-to-date asset management and administration fees of $57 million increased 21% versus the prior year period.
Turning to expenses. Our adjusted compensation ratio for the third quarter is 58.5%, which brings our year-to-date comp ratio to 58.8%. This reflects our current best estimate on compensation for the full year. As John indicated, our backlog is strong, but as always, our revenue in a given period depends on the timing of deal closings, and that is even more so this year than in others.
Additionally, as has been widely reported, market pressures on compensation levels for junior and mid-level bankers remains high, and hiring has been strong. As we always do, we will continue to evaluate the key drivers of our compensation as the year progresses and make adjustments in the fourth quarter, if appropriate.
Third quarter non-compensation costs of $83 million increased 17% year-over-year, driven by higher professional fees due to higher activity levels and strong recruiting efforts, higher T&Es due to both increased travel and entertainment, and higher occupancy expense due to more space as we grow, as well as expenses relating to our return to the office.
On a sequential basis, non-compensation expenses increased 14%, driven by higher professional fees, which reflected the aforementioned recruiting costs, higher other operating expenses and higher T&E. Within other operating expenses, the increase was a result of higher bad debt expense. As many other firms have likely experienced, T&E has not rebounded as quickly as we anticipated earlier in the year.
We expect non-comp expenses, including T&E to continue to increase as we evolve towards more normal operations and T&E will naturally also pick up as we add SMDs and teams over time. In 2019, of our T&E expense, 83% was related to travel. Year-to-date, travel is running at about 20% of 2019 levels and we expect that to settle at 70% to 80% of pre-pandemic levels. We expect other T&E expenses to return to those experienced before the pandemic.
Third quarter adjusted operating income and adjusted net income of $262 million and $188 million increased 237% and 258%, respectively. Year-to-date adjusted operating income and adjusted net income of $674 million and $505 million increased 156% and 177%, respectively, versus the prior year period.
We delivered a third quarter adjusted operating margin of 31.5%, while third quarter adjusted EPS of $3.96 increased 257% year-over-year. Our year-to-date adjusted margin is 30.7%. Adjusted EPS of $10.41 increased 170% versus the prior year period.
Turning to our balance sheet. As of September 30th, we held $479 million in cash and equivalents and $1.3 billion in investment securities. As Ralph mentioned earlier, even with our strong return of capital, our balance sheet grows throughout the year as we accrue for annual bonus compensation that is paid in the first quarter. Our balance sheet also reflects the minimum levels of cash for operating our business, including capital to support our underwriting activities commitments related to deferred cash compensation previously awarded and cash needs for anticipated deferred compensation to be awarded in the first quarter, plus earnings that we recorded in the third quarter that have not yet been returned.
Year-to-date, we have bought back 4.1 million shares in total, approximately half of which is in excess of what we bought back to offset dilution from RSU grants.
Before we open up the line for questions, let me turn the call back over to John.
Thank you, Celeste.
I’d like to take a moment to reflect on the management transition announced this morning. Ralph has led this firm over the last 13 years, guiding us with vision, extraordinary leadership and management skills building a firm of broad and deep capability with the highest quality talent on the street.
Over the last five years, I’ve had the great good fortune to partner with Ralph and Roger to work together to continue our journey of growth supported by the same underpinning of principles on which Roger founded the firm 25 years ago. I’ve loved being Ralph’s partner and friend. Beyond being extraordinary business leader, he is an extraordinary person. I will miss his active involvement in the running of the firm, but plan to continue to call upon his sound counsel and judgment.
As I consider the current state of the firm, I feel both pride and optimism, proud of what we’ve accomplished, our expanded client base, a platform of broad, diverse and growing capabilities and the quality of our people who deliver each day for our clients and our shareholders and optimistic about what is ahead.
We have the right strategy to build upon our successes to date and I, along with all of our business leaders, intend to stay focused on long-term growth. As we look ahead, I believe the prospects for Evercore are clear and exciting.
With that, I’m pleased for us to answer questions. Operator, we’d like to open the line for questions. Thank you.
[Operator Instructions] Your first question comes from Devin Ryan from JMP Securities.
Thanks so much. Good morning. And just want to say to Ralph, really appreciate the past 12 years. Kudos on your leadership of Evercore, I know we’re not losing it yet, but I just want to make that comment. And I’ll make sure we update our model for the new guidance here.
So, anyways, just in terms of the recruiting outlook where I want to start here, three SMDs today, and I think three more joining. So, you’re clearly -- you’re seeing some nice momentum recently. And when you guys gave that four to six external higher range, the firm was much smaller, and so it seemed like on a percentage basis, a reasonable number. As the firm expands and kind of hit another level of scale, is it time to potentially increase that range, or how you guys are thinking about your ability to add external bankers? And then, I guess also, do you have the infrastructure in place just either personnel to recruit or the ability to add more than that four to six if opportunities come about?
Thank you, Devin, for that question. And it’s certainly something that we are thinking a lot about. Our target is 4% to 8%. And this year, including Kristy and Juan Pedro, who were more the beginning of the year, admittedly, we’re at the eight level, and maybe even north of that depending on when people make a commitment and come in.
But your question about how do we think about growth? For one thing, and this is something we’ve been talking a lot about, we’re doing more internal promotes. I think as a firm, we are growing our capability to recruit and train and retain high-quality talent at the middle level. And we have an aspiration for ramping up significantly our internal promotes. In fact, I think our pipeline is very strong. And as we look at partner promotions for this year, I think we have a very, very strong slate of people.
Having said that, you also asked about infrastructure in terms of recruiting, and I think we have a very good recruiting mechanism and a very strong group of people doing the recruiting. And I think that what we are doing is we are seeing more people, and we’re recruiting more, both at the senior level and the middle level.
In addition, as you know, we’ve promoted four people to be running our U.S. advisory group, who are also becoming much more involved in recruiting. So, we’re distributing those responsibilities even more broadly.
And so, what we’re doing there as well as our other businesses, we’re broadening the group of people who are increased -- who are doing the recruiting. As a result, we think that we are ramping up our capabilities. We do have an aspiration to continue to grow our high-quality talent on really from all those different sources. And I think that we’re on a very good track right now. We feel like we have real power in our ability to draw very talented people. It continues to be a real strength of the firm.
And Devin, I would just add, when I joined 12.5 years ago, in my first partners meeting, I said we’re going to go on a 12 to 15-year journey from a firm that grows and sustains itself by building other people’s talent to one that grows and sustains itself by hiring, training, developing, mentoring and promoting its own talent. We’re now 12 years into that 12 to 15-year journey. I think we’ll still continue to hire externally after 15 years. But, I think the -- if you look at the stock of senior managing directors and advisory right now, it’s roughly 40% internally promoted. That’s up from less than 10% 12 years ago. And if you look at the flow, new SMDs over the last three years, it’s roughly 50-50 internal and external. And I suspect, going forward, that will be at a minimum the amount -- the proportion that will come from internal promotions.
And just to reiterate one thing. We are expanding our pipeline and also the infrastructure to continue to recruit. So, we are really building out that capability. In addition, I think the programs that we’ve put in place to develop our talent are very, very strong. And so, I can easily see even more talent coming up. And therefore, I think we will be able to grow significantly through both internal and external.
Okay, great color. Thank you very much. And then, a follow-up, I guess, a bigger picture question, but we’re obviously talking to investors about this dynamic. Just in terms of the record advisory backdrop that we’re in, and I think people are trying to kind of parse through how much is just a hot cycle. We’re kind of in this great equity market and conditions are perfect for advisory activities versus some potential secular shifts that have been happening in the market and just the evolution of maybe the client base, both on the corporate side and sponsor side as people get more sophisticated. And there’s an ability to work with them across numerous additional products and just their willingness and maybe desire to transact and think strategically. And so, I don’t know if there’s any context you can add, but do you guys have any perspectives around any secular changes that you’re seeing in the advisory market that maybe does drive the baseline higher, all else equal, outside of just, hey, we’re in a really attractive part of the cycle?
Well, what we’re seeing is that there are so many conditions that are arrow up that it really is an incredibly strong environment, as you said. In terms of secular change, there is clearly a great deal of liquidity in the system that is not going to go away soon. There is a huge backlog of stacks that are looking for transactions. And we see real opportunity on corporate balance sheets as there’s a lot of leverage available as well as cash. So, all of those things are very positive.
We also think that as you said, the secular demand with respect to disruption in technology, and really thinking about how companies are going to grow differently is going to be an ongoing theme.
So, on the one hand, we definitely think we are in a period of real boom in terms of the merger market generally. There’s just no question that there’s a tremendous amount of driven demand by some of the factors that we’re seeing in the market that you’ve all too well articulated in a lot of your research. But, having said that, we do see some very sustained secular demand that really will continue companies and other parties as well, including sponsors to drive more activity. So, we think that the market will be continuing at a good pace. We don’t see any storm clouds and we do think there is some real secular strength.
Your next question comes from Brennan Hawken from UBS.
Good morning. Thanks for taking my question. And I’d also like to say, Ralph, congratulations. You certainly hand the business to John in great shape. And we definitely had a lot of laughs over the years. So, personally, really appreciate it. John, really looking forward to working with you and also looking forward to watching how you transition Evercore into the next phase.
With all that said, capital. Ralph, you broke from your normal tradition in a few ways and you made reference to excess cash position at a couple of points here recently. What is that excess cash position currently? Is that something you can provide?
That’s way above my pay grade. I’m going to let Celeste answer.
Hey. Hi, Brennan. So, just to remind you, our cash position and needs over the course of the year will fluctuate. Typically, our requirements in the beginning of the year will be the lowest because we hope to have just paid out for the prior year and past years compensation. And then, towards the end of the year, our cash needs will be the highest as we have through the full year of accruals and cash set aside to pay out, typically in late February, early March. So, with that in mind, at the end of the first quarter, our excess position, which is looking at the excess of our cash equivalents and investments, was about 20%. Today, it’s in the single digits. But, I have to remind you again, going into year-end, there’s a lot of movement. So, the amount we need and then the questions around what we need to pay out are still being worked out as we talked about with the comp ratio in the prepared remarks.
Yes. That makes a lot of sense, and thanks for walking through the cadence -- the sort of annual cadence. Is it typical -- I guess, the follow-up question would be, does the pattern that you referenced where you were at 28% after paying out the year-end and now in the single digits, does -- is that cadence typical? How much does it vary? And what does a normal year look like?
I don’t think we could talk to a normal year yet since that we changed our behavior in 2020 in terms of what we hold cash for. And last year, as you know, at the end of the year, activity increased pretty dramatically. So, I think we’ll get a better sense for what that cadence looks like. One thing to keep in mind is the amount that we need to run our business after we increased it last year, as Ralph referenced, is fairly stable. That’s probably a little under a third of what we have today. So, that number won’t move around too much, but we’ll have a better sense for the ebbs and flows as we work through the next couple of years.
Okay. That makes sense. Thanks for that, Celeste. I appreciate it. And Celeste, you also -- you gave us a lot to chew marks. I had to scribble notes a lot more curiously this quarter. So, I really appreciate that. Your comments around travel were really helpful. You think 70% to 80% of pre-pandemic levels. Is that expected to be a slow ramp? The back to office has been a bit more slow than we had started -- than we had anticipated here as we move through 2021. So, do you have any -- obviously, this is all going to be fluid as we go through this. But, any sense for what that might look like into ‘22, or how are you planning around what it might look like in ‘22?
We really don’t know, Brennan, where people are making decisions based on their clients and their needs on a day-to-day basis where we’re back in the office, not everybody is back. So, I think we’re watching and waiting. We have a sense for where we think it lands, but how it’s -- what it’s going to look like in between is sort of anybody’s guess at this point.
Yes. Brennan, I would say, what Celeste articulated is best described as our best guess as to where it ultimately winds up. And as Celeste said, it’s really hard to predict the path at which it gets there.
Your next question comes from James Yaro from Goldman Sachs.
Thanks, and congratulations, Ralph, on the past 12 years. So, supply chain disruptions and inflation are increasingly topical in the dialogue with investors. So, I guess, I’m just curious how relevant they are in your discussions with CEOs and boards? And are you seeing that catalyzed client activity at all?
Well, there is definitely increased client activity right now as we look at the end of the year and a possible change in capital gains as we see people being motivated that way. Well, in terms of supply chain disruption and inflation, I think CEOs and boards are very focused on that. In many respects, the supply chain disruption, which has led to a difficulty in procuring resources and ingredients for businesses and therefore driving costs and also increasing timing is clearly a concern. We haven’t really seen it to be impacting merger dialogues per structure, other than businesses are looking at their numbers and their projections, and they’re changing constantly.
Inflation is something that is a little bit more longer term for companies. And so, as we -- as I sit in boards and as we undertake giving advice to boards, inflation is put into the numbers as we run the numbers. But, we don’t think there’s any dramatic impact of inflation on the overall merger activity or those discussions right now.
Having said that, there’s a whole number of factors that are being considered in board rooms, which is the supply change disruptions, whether there’s going to be a COVID disruption to recovery, how is the government going to be really driving the economy, what’s the Fed going to do? And also, I think the other thing that you didn’t mention, but it’s clearly something that is on people’s minds, which is the whole posture that the government is going to take on antitrust, which we really don’t know yet, per se. We haven’t really seen any of that really come out and impacted in a very direct way, although we have been given some indications about how the Justice Department is thinking about things and the FTC is thinking about things.
So anyway, there’s a lot of factors that are in and around the business, but we see the business continuing to really plug along as it has right now.
Okay. That’s really helpful. And then just turning to the sponsor activity levels that have been so robust so far this year. When you think about the longer term trajectory for this, obviously, I think there’s an expectation that there will be continued dry powder deployment and raising of new funds. But, I guess, the question is, as these sponsors term out their funds and you see more LP stake trading, do you think that could weigh on the M&A activity for sponsors, even if the levels of capital remain the same and dry powder continues?
We see just tremendous activity on the sponsor side. We see it from so many different respects. As we said, we have very strong relationships with them, both on the deal level side with the everyday M&A that they’re doing, but we also see the GPs and the LPs and the activity levels there.
And I would just try to summarize it by saying that sponsors and sponsor funds have been an extremely important investment vehicle and more and more of the big capital stores are thinking about trying to increase their portfolios with that kind of private investment. So, the money is going to keep going in. There will be more and more ways to divest or to monetize assets. But, as we look at things, it’s really going to be more additive than really taking away. So, our view of the sponsor business, and this is really kind of reflected in how we’re thinking about our strategy is that the sponsor business is going to be -- continue to be very healthy. And if anything, grow, we don’t think it’s going to be impaired by the way people can divest resources or monetize. We think it’s actually going to be a positive uplift and that it will continue in a very-expanded way.
Yes. I would just add a couple of things. First of all, looking at 2020 and 2021, and I -- we said this a while ago during 2020. Evercore is a lot more of an all-weather firm today than it was six, seven, eight years ago. And as we showed last year, even when M&A went on virtual pause for six months or so, our year-to-date revenues at the end of the third quarter of last year were exactly equal to those in 2019. And sponsors are a big part of that because a good part of the leverage in the system is in sponsor-owned companies. So, when -- even if their deployment of capital or their harvesting of their portfolio companies slows down, there’s still lots and lots to do with sponsors.
Second point I would make is unlike our large corporate clients, the basic business of sponsors is buying and selling companies. That’s what they do. And that’s -- and our business is helping people who buy and sell companies. So, they are always going to be a critical part of our business. And as John pointed out, the amount of capital in private equity has grown quite rapidly over the last few years. And there is no question that large institutional investors will continue to increase the proportion of their portfolios that are in private equity.
Your next question comes from Steven Chubak from Wolfe Research.
Hi. Good morning. So, maybe just a question for both, John and Celeste, on the go-forward strategy. Just given the recent leadership changes, inevitably, there’s always prompt some speculation as to how the strategy might evolve under the new leadership team. And with the caveat, John, that you’ve been in the Co-CEO seat for a number of years now, I was hoping you can just provide some perspective on whether there might be any changes to the strategy and the approach to driving growth of the firm on how your philosophy might differ relative to Ralph and Celeste, you versus Bob?
I’ve been with the firm for five years. And for those five years, I’ve worked closely with Ralph and Roger on really driving the growth of the firm. And so, I feel very comfortable with where we are right now on the strategy. We have a number of things that we’re working hard on. One is enhancing the client focus. We’ve really thought about where we have white space and where we can really add and it will be powerful to add. And those would be sectors like media and telecom in Europe or consumer in Europe, health care, basic materials, professional service. There are many different places where we still have real room to add very strong people in sectors.
In addition, geography, we still have some real work to do in some of the geography where we want to be, whether it’s adding something in Paris possibly if we find the right group of people or whether it’s building out and deepening what we’re doing in Germany.
In addition, we continue to have some, I think, very strong client initiatives with respect to coverage. We are building out our financial sponsors business, as we’ve referred to a couple of times in this call. And we’re also really doubling down and thinking more expansively about large multinational relationships and the level of coverage and the standard of coverage we have on a particular set of focused clients that are multinational.
In addition, the second piece that I think we’re spending a lot of time thinking about is broadening and deepening our capabilities. I mean, as you’ve seen with respect to equity capital markets, we continue to build that out, whether it’s building out sector coverage in ECM or continuing to invest in our convert business or driving SPAC expertise and really trying to take advantage of that. In addition, we have a debt advisory business that we think has a lot of potential to build out.
And then finally, a really important part of our growth is investing in the fastest segments of the economy. As Ralph said, places like fintech, biotech, clean tech and traditional techs are critical to us. The total addressable market for those are growing faster than we can actually add stabilities. And we do think that by adding really strong people in those areas and promoting really strong people in those areas, there’s real growth to be had. So, those are all really important parts of the existing strategy that we feel really good about.
In addition, one of the other things that I think we are really making sure that we’re focusing on is the ramp of our SMDs. We have over 30 SMDs that are in a state of ramp. And investing in them and helping them become even better at their job is a really important part of what we think is our growth.
So, on all of those levels, we think we’ve got a really strong strategy, and I’m very committed to it. There will be other things that we think about that we decide are going to be important for us to build out, and we certainly will and we’ll be flexible and open. But, right now, I think we’ve got a very sound strategy. Celeste, do you want to...
Yes. I mean, Bob and I are very similar in our approach, which is we’re both here to ensure that the Company has all of the elements in place to be successful and sustainable. And so, that the people facing clients don’t need to worry about whether -- don’t need to worry about things back in the office. And I’m here to support John and the senior leadership of the businesses to ensure that they have the tools and the things they need to be successful. And I believe that’s very consistent with Bob’s approach as well.
Understood. And Celeste, just one follow-up from me. I know that you’ve given some context around how you’re thinking about excess liquidity. And I was hoping just to clarify some of the remarks, you mentioned that the excess -- I think it’s on a spot basis, you’d mentioned high single digit. And I just was hoping that you could unpack, is that a percentage of just cash and equivalents on the balance sheet? And just trying to understand how you think about the level of excess liquidity that you need to maintain on a go-forward basis as we think about your buyback capacity?
Yes. So, that’s in excess beyond -- sorry, as we think about cash and equivalents and investments on the balance sheet. So, that is beyond what we set aside for comp, what we believe we need to run the businesses and other working capital needs. So, again, it’s over the larger cash and equivalents plus investments number.
Got it. Okay. That’s great. Thanks so much for taking my questions.
So, the denominator is a 10-figure number, not a 9-figure.
That’s right. So, about $1.7 billion something.
Your next question comes from Michael Brown from KBW.
I guess, I just wanted to dive in a little bit deeper into the M&A market, just given its strength here, how are you guys managing the workload for your staff? It seems like that may be kind of the governor on potential revenue growth, just having enough talent to address the workload. And in this environment, are you seeing kind of expansion in the fee rates here? Can you just kind of speak to that? And then, as you look forward, which areas of the market do you think could ultimately accelerate by region, type, sector and size?
Well, in terms of the actual capacity, there isn’t any business that we would like to do that we can’t do and we’re not doing. So, when business comes in, we accommodate and we think about it. But, we are built to actually sustain high levels. And right now, I think there is a great amount of activity, but we continue to bring in good new assignments, and we continue to execute them.
Clearly, people are working hard. And we are very, very watchful of making sure that we try and help to address what I think could be burnout issues over time. But, our people are doing very well. As you know, we were remote for a long period of time. We’ve brought people back into the office to a large extent. And I think that really the capacity level of what we’re putting out right now is very high. And I really think that we can continue at that pace. And so, from that standpoint, we’re not seeing capacity issues. We’re clearly watching our junior levels. But, I think that right now, we feel like we’re in a decent place.
In terms of expansion going forward and how we think about the market, there’s just any number of life in terms of the type of projects that can come in and are coming in, and we are accommodating all of those things. And I think that as we look at the market generally, we continue to call on clients and continue to bring new ideas to them, and those ideas are pushing forward. Am I missing a piece of that question?
That was really helpful, John. I guess, yes, maybe just I was looking for maybe a finer point on -- look to 2022, which areas of the market if you could ultimately accelerate maybe there were laggards this year that you think could pick up and be leaders next year? And any comments by region, type, sector or size would be great.
Well, clearly, we’re seeing some pickup in Europe, and we’re seeing that. We are -- in terms of our product set, we are looking out and I’d say that in the industry groups, pretty much all of our industry groups are very busy. Some of them may be ringing in bigger assignments right now. For example, in the health care area, there’s a lot of interesting assignments in and about, especially in the public offering side. We also are seeing some real activity on the M&A side in health care. But also in technology, there’s just a lot of activity in that sector also that we see.
We don’t really see real laggards in our system right now, at least I don’t. I don’t know, Ralph, if you see anything. But, I’m really looking out -- and Ralph and I speak to our business leaders in each of our industry groups pretty much on a daily, if not weekly basis, but really on a daily basis, we’re talking to people. And I think there’s a very consistent activity levels. Some of them are turning into bigger transactions or a higher volume of transactions, more regularly right now. But I can’t think that -- I haven’t seen an activity level in terms of discussion and possibility at this level really in many, many years. I don’t know, Ralph, if you want to...
I agree with that. First of all, I would say that our shareholders and all of you who communicate with them are fortunate to own a highly diversified set of industry exposures, geographic exposures and product exposures. So, I mean, we’re at a size and scale now that a comment about this industry or that industry is kind of a yawn to be honest.
Second thing, I would say, and I agree with John, is I have yet to find the person in our advisory business this year, who isn’t just working flat out full speed ahead. It’s a good environment right now, and it’s a good environment in every single sector that we cover in every geography that we cover. And in every product area with the exception of restructuring, which obviously, with 1% default rates has slowed down a little bit. But even there, we -- it’s not dead. It’s just slower than it was last year.
Great. Yes, very interesting observations there. Just one quick follow-up for me for Celeste. So, I appreciate the color on the pull forward this quarter. That certainly helps our modeling and make sure we kind of view the geologic information correctly. How many transactions did that $93 million pull forward would present?
I don’t have that number with me. It’s a handful, but I just don’t have it in front of me. It moves around from quarter-to-quarter just depending on when things land.
We have got over the allotted time. I would now like to turn the floor to Ralph Schlosstein and John Weinberg for closing comments.
That concludes our call. Thank you everyone for your participation, and we’ll see you next time.
This concludes today’s Evercore third quarter 2021 financial results conference call. You may now disconnect.