Lazard Ltd

NYSE:LAZ

Earnings Call Transcript 2023-Q1

[Operator]

Good morning and welcome to Lazard's First Quarter 2023 Earnings Conference Call. This call is being recorded. [Operator Instructions]

At this time, I will turn the call over to Alexandra Deignan, Lazard's Head of Investor Relations and Corporate Sustainability. Please go ahead.

[Alexandra Deignan]

Thank you, Britney. Good morning, and welcome to Lazard's earnings call for the first quarter of 2023. I'm Alexandra Deignan, Head of Investor Relations and Corporate Sustainability. In addition to today's audio comments, we have posted our earnings release and an investor presentation on our website. A replay of this call will also be available on our website later today.

Before we begin, let me remind you that we may make forward-looking statements about our business and performance. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including, but not limited to, those factors discussed in the company's SEC filings, which you can access on our website. Lazard assumes no responsibility for the accuracy or completeness of these forward-looking statements and assumes no duty to update these forward-looking statements.

Today's discussion also includes certain non-GAAP financial measures that we believe are meaningful when evaluating the company's performance. A reconciliation of these non-GAAP financial measures to the comparable GAAP measure is provided in our earnings release and investor presentation.

Hosting our call today are Kenneth Jacobs, Lazard's Chairman and Chief Executive Officer; and Mary Ann Betsch, Lazard's Chief Financial Officer. Mary Ann will start the discussion with an overview of our financial results, then Ken will provide his perspective on the outlook for our business. After that, Ken and Mary Ann will be joined by Peter Orszag, Chief Executive Officer of Financial Advisory; and Evan Russo, Chief Executive Officer of Asset Management as they will open the call to questions.

I'll now turn the call over to Mary Ann.

[Mary Ann Betsch, Chief Financial Officer]

Thanks, Ale, and good morning, everyone. Today, we reported first quarter 2023 operating revenue of $527 million, a 25% decrease from the first quarter of 2022 and a net loss of $23 million on an adjusted basis. In Financial Advisory, we reported first quarter operating revenue of $274 million, down 29% from last year's first quarter.

The ongoing slowdown in M&A activity globally continues to present a significant headwind for financial advisory. However, we remain actively engaged with clients in both Europe and the U.S. In restructuring, activity picked up throughout the quarter, and we are working on a number of complex assignments.

In Asset Management, first quarter operating revenue was $265 million, an increase of 2% compared to the fourth quarter of 2022 and 15% lower than in the first quarter of 2022. Management fees and other revenue was $259 million for the first quarter, a 6% increase from the fourth quarter of 2022 and 10% lower than the prior year period.

For the first quarter, incentive fees were $5 million as compared to $25 million in the prior year quarter, reflecting weaker fixed income markets. As of March 31, 2023, we reported AUM of $232 billion, up 7% from December 31, 2022. This increase was driven by market appreciation of $11.6 billion, foreign currency appreciation of $1.4 billion and net inflows of $3 billion.

Average AUM for the first quarter was $227 billion, 7% higher than in the fourth quarter of 2022, and a decrease of 12% from the prior year period. As of April 21, our AUM was approximately $236 billion, driven by market appreciation of $2.6 billion foreign currency appreciation of $500 million and net inflows of $400 million.

In corporate, operating losses of $11 million included corporate revenues of $10 million, which were more than offset by a charge of $18 million associated with the liquidation of the firm's special purpose acquisition company in February.

Now turning to expenses. For the first quarter, adjusted compensation expense was $399 million, 2% lower than the prior year quarter. This equates to a 75.7% adjusted ratio during the first quarter compared to 58.5% in the first quarter of 2022. The higher compensation ratio is due to a combination of lower operating revenue, the liquidation of our SPAC and higher fixed costs from amortization of prior year grants as well as an increase in our workforce and inflationary impacts.

Our non-compensation expense was $142 million in the first quarter, 21% higher than the prior year quarter primarily reflecting higher travel and professional services expenses as well as continued investments in technology and the ongoing impact of inflation.

In light of the current environment, Lazard is conducting cost-saving initiatives. These initiatives are expected to result in the reduction of approximately 10% of our workforce globally over the course of 2023, which, combined with non-compensation initiatives, we believe will result in a reduction of approximately 10% in our run rate cost base compared to 2022. This should better position us in a normalized revenue environment to achieve our historical profitability ranges in 2024 and to continue to strategically invest in the business and return capital to shareholders.

As a result of these cost-saving initiatives, and assuming the challenging environment continues, we expect to achieve an awarded compensation ratio for the full year in the mid-60% range. Taking these actions resulted in a charge of $21 million in the first quarter and we expect an additional charge of approximately $95 million over the course of the year, which will be excluded from our adjusted results.

Our operating loss for the first quarter of 2023 generated a tax benefit of $11 million on an adjusted basis. We expect our annual effective tax rate for the full year 2023 to be in the mid-20% range reflecting discrete items, which typically occur in the fourth quarter.

Turning to capital allocation. In the first quarter of 2023, we will return $187 million to shareholders including $43 million in dividends, $99 million in share repurchases and $45 million in satisfaction of employee tax obligations upon vesting of equity grants. Our diluted average share count is 87.6 million shares, which equates to the basic share count due to the anti-dilutive impact of losses.

During the first quarter, we bought back 2.7 million shares at an average price of $36.75 per share. These repurchases largely offset dilution from our 2022 year-end equity compensation grants. Our total outstanding share repurchase authorization as of March 31 was $203 million.

Lazard's financial position remains strong. And on Wednesday, we declared a quarterly dividend of $0.50 per share.

Ken will now provide his perspective on our performance and outlook.

[Kenneth Jacobs, Chairman and Chief Executive Officer]

Thank you, Mary Ann. Obviously, it was a tough quarter. During Q1, M&A activity fell back to levels last seen in 2012. Announcements and completions for the industry were down approximately 50% year-on-year and down approximately 30% compared to the fourth quarter of 2022. Our financial advisory results reflect these market conditions. That said, we are seeing some improvement in client dialogues and deal activity indicators such as complex clearances, new projects and engagements.

Our European Advisory business continued its strong performance in the first quarter and restructuring activity is increasing, especially in the U.S. We recently added 2 new managing directors and restructuring, further bolstering a business that is already ranked number one globally in industry league tables. We also appointed Ray McGuire as President during the quarter with almost 40 years of experience in investment banking and M&A. Ray will play a key role in strengthening Lazard's senior relationships and originating new business for financial advisory and across the wider firm.

We are also seeing momentum in Lazard's Asset Management business with rising AUM driven by higher asset levels and continued strong performance by many of our strategies. In fact, more than 80% of our strategies based on AUM are outperforming relative benchmarks on a 1-year basis, reflecting a market that is moving more towards fundamentals.

While growth stocks outperformed in the first quarter, quality was the second best factor benefiting from resilience and uncertain periods. As an active manager, we see significant opportunity to deliver outperformance as volatility uncertainty continue to create a unique set of economic and market conditions. The recent stress in the banking sector, in particular, reinforces our conviction in our fundamental approach, which we believe will continue to translate into long-term alpha generation.

In the first quarter, asset management also expanded its capabilities in providing strategic advice and wealth management to families with the establishment of Lazard family office partners. While Lazard's business continued to perform solidly, we cannot ignore the environment in which we are operating. The recent news flow is unlikely to improve confidence among decision-makers near term or make them any less reticent about committing capital. As such, the slowdown in M&A is likely to extend beyond the first quarter.

Similarly, for asset management, the market outlook is likely to remain volatile, so long as there is a lack of conviction about the evolution of the macroeconomic environment. Given this backdrop and the significant inflation in costs across our industry over the past several years, we made the decision to enact cost-saving initiatives.

As Mary Ann outlined, we are targeting a 10% reduction in our cost base as compared to 2022. We expect to achieve that on a run rate basis by the end of 2023. We believe we can accomplish this without impacting the productive capacity of the firm. We are reducing headcount in areas where there are fewer opportunities for revenue generation and resizing support functions. These initiatives will result in significant additional cash flow that will enable us to continue to invest in our business at a time when those investments are more attractively priced while continuing to return capital to our shareholders.

In closing, I would like to acknowledge the dedication and commitment of our impacted employees, many of whom have contributed to the firm's success for many years.

Now let's open the call to questions. Thank you.

[Operator]

[Operator Instructions] We will take our first question from Brennan Hawken with UBS. Your line is now open.

[Kenneth Jacobs, Chairman and Chief Executive Officer]

Hi Brennan.

[Brennan Hawken, UBS]

Hey, how you doing, Ken? Good morning. Thank you for taking my questions. I'd like to start on the plans for the workforce reduction. You guys provided an expectation for the awarded comp ratio for the year. But how should we expect that to translate into an actual reported adjusted comp ratio? And also, Ken, when you touched on -- you gave a little color around the expected expense reduction, but could you maybe provide a bit more specificity around how you would manage these cuts without impacting revenue and where they'll be focused?

[Kenneth Jacobs, Chairman and Chief Executive Officer]

Sure. Okay. Let me take a minute and just give a little bit of context for why now in terms of the headcount -- in terms of the cost restructuring and the cost initiatives and then get to your question on the awarded versus GAAP and then touch on finally, the productive capacity point.

Let's start. December, Goldman Conference, Earnings, February 2. I think in both cases, I was asked how do you think about the environment? And how are you thinking about cost initiatives? And in both context, what I said was, look, things appear to be a little bit better today than we would have expected six months before. And so consequently, what we're going to do is kind of take a look and see things -- how things unfold and into midyear.

Candidly, things have really deteriorated, I think, overall in the external environment relative to where we were in December and again in February. And so consequently, we just felt it was time to take some action. We didn't want to keep our head in the sand about this and always time to move on this. So that's the background to this.

When we look at our business, a couple of things stuck out. The first is, as you know, on the advisory side, in particular, we have a more global footprint than many of our competitors do. And a lot of this was designed for a geopolitical environment in the mid-teens, which is, in fact, very different from today. So to your point on productive capacity, some of this is just reorienting headcount from places where we think there's less opportunity than there was at that time.

Second, when we look at the business today, and we look back on the fact that coming out of the pandemic, there was a real demand for talent, and we didn't do any cuts during the pandemic. And as I said in December, we were kind of holding off on doing anything at the end of 2022 of significance. There's probably some buildup in capacity generally across the business, which could be reduced at this time without necessarily again, affecting productive capacity.

And then finally, when you think about the environment we're in, particularly on the advisory side, we've had now 5, I guess, or 4 or 5 sequential quarters of down announcements which means that if you think about completions, anywhere from 6 to 18 months out, shorter for financial sponsors longer for the more complicated strategic deals, you're not likely to see a pickup in M&A at completions this year, which means the revenue environment is going to be difficult through this year and could even extend into the first quarter of next year.

So when you think about that, and you say to yourself, okay, we're not bouncing back to 2021 revenues in 2020 -- I don't think our industry is bouncing back to 2021 revenues in 2024 that quick in all likelihood. And then you look at what the environment could be like in 2024, which maybe you get back to 2022 or 2020 levels. And then you think about the inflation in costs across our industry, you just had to take some action.

And so when we think about that, we've seen big increases across the industry in salary. That means benefits are going up. That's very sticky. It's very hard to get that out of the system. You don't reduce salaries. And what that means benefits or stuck on non-compensation we've seen across the board increases in everything from travel and entertainment, to information services, to IT costs. And so consequently, getting the cost structure in place so that we can get back to our targeted profitability was going to require this kind of action. So that's the background to it.

As to the comp ratio, adjusted GAAP versus -- or GAAP versus awarded, we control the awarded compensation. That's actually what we pay in a given year, regardless of the deferral and such. And so we have more ability to manage that and get to where we want to be on that in a very -- in a variety of revenue environments. It's not perfect, but it allows us more control, and that's really what drives cash earnings for us, which is what we're really focused on.

The adjusted GAAP number or the GAAP compensation, as you know, is reflective of the -- of your previous compensation costs, 2021 -- 2021, record year compensation 2022 and it's all the deferrals from those years. So we have a little bit less flexibility there. Obviously, less flexibility there in a down revenue environment, which is why we started speaking about awarded back in '09 and tend to kind of manage through the cycle and give people a real visibility on how the business is managed through the cycle.

So when you think about where a gap comes out this year, my hunch is it probably is in the high 60s, if we become more conservative around deferrals that is put more cash into the system and mid-60s, if we follow the deferral policies that we've had over the last year or so. And so consequently, that's kind of the range. And a lot of it is going to depend on the revenue environment and also the way that I think that we're best able to compensate people at the end of the year. And so that's going to be our thought process there.

[Brennan Hawken, UBS]

Sure. Great. Sorry go ahead. No, no, please. I didn't mean to interrupt you.

[Kenneth Jacobs, Chairman and Chief Executive Officer]

I think you had one more question.

[Brennan Hawken, UBS]

It was around how you execute year and avoid impacting the revenue?

[Kenneth Jacobs, Chairman and Chief Executive Officer]

Yes. I think I touched on that. I think it's a combination of two things. One is where we think we have less opportunity and people and then where the investments are going to go in the future. I think that really is it.

[Brennan Hawken, UBS]

Got it. Okay. That was very thorough. Ken. I appreciate it. And then the follow-up, it does seem, based upon some analysis around the fixed comp expense that you have. It does seem as though there was some incentive accrual since you're going through and doing some workforce reduction. Obviously, that will play through -- where that gets executed will play through on that adjusted reported comp, as you discussed. But how should we be thinking about the potential for some of these incentives that may be you booked to be adjusted as you get through the year, would you think that there would be the capacity for that as the revenue picture becomes more clear based on the outlook?

[Kenneth Jacobs, Chairman and Chief Executive Officer]

So I think I'm following the question, so let me kind of answer what I think is the question. Look, in the first quarter, generally speaking, there's some accrual for incentive comp, but it's usually pretty small. Each of the first quarters. That's just historically the case. And then I think the second is there room as a result of some of these restructurings to have more flexibility at year-end, the short answer is yes, but all of this doesn't really kick in until we get to 2024.

[Brennan Hawken, UBS]

Okay. All right. Appreciate it.

[Operator]

We'll take our next question from James Yaro with Goldman Sachs. Your line is open.

[James Yaro, Goldman Sachs]

Good morning, and thanks for taking my question. I just wanted to first touch on your outlook for M&A in Europe versus the U.S. given clearly as a somewhat healthier banking system today, and appears to have a somewhat stronger near term economic trajectory as well.

[Kenneth Jacobs, Chairman and Chief Executive Officer]

It's a good question. So kind of surprising, our first quarter performance in Europe, which, of course, is dependent a bit on what was announced 6, 12 months before. It was actually quite strong. And when we look at the business in Europe right now, look, there has clearly been a slowdown in announcements over the last 4 or 5 quarters in Europe as well. But when we look at the individual businesses in Europe at the moment, they're pretty robust.

And I'm not sure that plays into revenue in a quarter by quarter, but I feel pretty good about where our franchise is in Europe right now and the activity levels, while clearly less than they were in 2021 or not, at least for the businesses where the business we're doing and the countries we're in, it's not terrible at the moment.

[James Yaro, Goldman Sachs]

Okay. That's very helpful. And then if we just turn to restructuring, maybe you could just talk about the type of assignments and geographies in which you're seeing the biggest pickup in that business? When should we expect the pace of the restructuring to actually hit your revenue? And then what's your view on the length of this restructuring cycle at this point?

[Kenneth Jacobs, Chairman and Chief Executive Officer]

Okay. Great question. So first of all, this M&A cycle and restructuring cycle seems to be very different from '01, '02, '06, '09 or '14, '13, whatever it was, even the short restructuring cycle before the pandemic. Generally speaking, our experience has been -- not even general, but our experience historically has been that when M&A turns down, usually some period of time prior to the M&A turn down, restructuring assignments start to pick up and the restructuring cycle offset some of the decline in M&A. That's been our experience in the past.

What's unusual about this restructuring cycle is it's been delayed, muted and delayed. That said, we're finally seeing a real pickup in activity. And that probably starts to translate into revenue towards the end of this year into the beginning of next year. And to that end, actually, we've just added 2 new restructuring partners, one focused on creditor assignments, which is an area that we've been trying to build. So I think that should help us a bit just in terms of the market share gains there.

But generally speaking, this has been muted so far. Do I think it's going to last longer? I think part of that is going to be dependent on what happens in the banking sector. If we get a real credit crunch there, then this could be quite a long cycle. If we get a more muted credit crunch, it probably is going to be a good cycle. Good in the sense that there'll be activity because there's a lot of maturities coming due in a higher interest rate environment, and that's going to, I think, make for some stress overall. But the actual breadth in the market will, in part, be dependent on what happens with the credit crunch.

[James Yaro, Goldman Sachs]

That's very clear. Thanks for taking the time.

[Kenneth Jacobs, Chairman and Chief Executive Officer]

And as far as sectors, I think you're going to see a lot of activity in real estate, which is a strong area for us. Retail, as you can see, continues to be an area which has been difficult. And then I think it was more or less going to be focused on companies that have overlevered capital structures with near-term maturities. That's where the pressure is, and that are affected by downturn in the economy.

[James Yaro, Goldman Sachs]

Okay, thank you so much. Appreciate that.

[Operator]

We will take our next question from Devin Ryan with JMP Securities. Your line is now open.

[Kenneth Jacobs, Chairman and Chief Executive Officer]

Hi Devin.

[Devin Ryan, JMP Securities]

Hey, good morning. I just want to come back to the conversation on the expense reduction. So the 10%, is that equal across segments? Or is that more weighted towards advisory is kind of the first point.

And then it sounds like some aspect of this is just a little bit of kind of -- you've been dragging your feet on areas where maybe the fee pools aren't as compelling today as they were in the past. And so now it's kind of the time to do that plus some incremental trimming where the environment today is challenged, right? So I just want to kind of clarify within that.

And then the other part of the question is, so then what does this mean for investing in 2 parts of the business where maybe the fee pool is becoming more compelling in advisory where you guys have been pretty active recruiting externally over the past couple of years?

[Kenneth Jacobs, Chairman and Chief Executive Officer]

Okay. So let's start with the last question, but I think it was the last question first. Part of the objective here in terms of taking this action now is to get ahead of the environment. For two reasons. One is that the M&A business is a cyclical business. It's when the -- there's summer fall, followed by winter and then there's spring/summer again. This is cycles. That's the business we're in. And we're in a down cycle right now. Experience tells us that in a cycle like this, you probably want to do this early for 2 reasons. One is you get it out of the way. So people are focused and ready for the recovery. And what you're doing with clients now determines how well you do as the recovery takes place. So that's kind of part one.

Part 2 is, this is the environment where if you can create enough room in the cost structure to allow for future investment, which is what we're trying to do here, it's an environment where you can pick up really incrementally good talent. And that's what we're focused on is senior talent -- productive talent in the places that matter to us, which I think here is going to be in the U.S. and in Europe.

So that's the goal here, is one to get ahead of it so that when the recovery does, we're not distracted by a restructuring that took place at the end of it, and then number 2 is just to make sure we have the fuel to continue to invest in our business at a time when those investments are priced much more attractively. So that's kind of part one.

As far as the places where productivity is, look, I'm not so sure we were behind the curve on this. I just think this is a changing environment, a changing cycle. And unfortunately, these are the times where you have to do these things, and these are tough decisions. And you're always making bets in this business as to where the cycle is going to -- where the activity is going to be in the next cycle and we're making those bets now in terms of what we're doing here.

As far as where the headcounts are coming from, look, the advisory business has more people than the asset management business has. So obviously, it's going to be more impacted than the asset management businesses. The office closings are all on the advisory side. And with regard to corporate, I think there's a fair amount of reengineering that's taking place there and the -- it's going to be impacted as well.

[Devin Ryan, JMP Securities]

Okay, thanks for the thorough answer Ken. I believe Evan is on the call.

[Evan Russo, Chief Executive Officer, Asset Management]

Yes.

[Devin Ryan, JMP Securities]

Okay. I believe Evan is on the call. So I want to ask what just -- okay, great. So Evan, obviously, you've now been in the seat for nearly a year on the asset management side. So just walk to maybe dig in around kind of your thoughts in that seat kind of strategic priorities and maybe areas that may get more investment or less investment? Or how are you thinking about just the overall growth profile and strategy of that business now that you've been in the seat for a year?

[Kenneth Jacobs, Chairman and Chief Executive Officer]

Sure. Devin, happy to share some thoughts on that. I mean it's been several -- obviously several quarters now, a couple of quarters of direct involvement here in the asset management business, but obviously I've been in the asset management -- focused on asset management for the last 5 years as CFO as well.

So continuation of our strategy is what we set up at the beginning. We've been focused on 3 specific areas for us, which is really; first is foremost is performance and focusing on the performance of all of our funds. And as Ken mentioned earlier, 80% of our funds outperforming their benchmarks on a one-year basis. So I think we've had some good success there. Obviously, the market movement more towards fundamental investing that we've seen over the past 6 to 9 months has been playing towards the areas of our strength, which are relative value, quality and sort of factor quant, which is the area of focus for our business, both across fixed income and equities.

And so I think performance is an area we're going to continue to focus on. We're spending a lot of time thinking about what kind of tools and resources, research and insights, how do you generate the best insights across the platform we have. We have tremendous amounts of intellectual capital on a global basis. We're lucky to have such great teams in all emerging markets and global international and in local areas around the world and I think bringing together those insights allow us to truly have an advantage on a performance basis in so many of our funds, especially in fundamental areas of the markets and certainly markets to become more fundamentally driven.

The other area that we've spent a little bit of time focusing on, I think it will be a continued focus for us is going to be on the distribution side of our business. Over the last several years, we focused on the global basis of our distribution capabilities. We've added a lot in Europe. We've talked about that in past quarters. Now we're focusing a little bit more on the North American market. We've made a couple of strategic hires over the last quarter or so. We expect to continue to focus on that as well.

So enhancing distribution, making sure our teams are working well together, coordination in an environment that certainly remains volatile from a market's perspective where clients need us to be thinking forward thinking ahead and helping them to think about allocations is becoming really, really critical.

In a market like this is where Lazard tends to shine. I mean, we're long-term advisers with many of our clients, maybe our client relationships go back more than a decade and sometimes two decades. And so in many ways, they turn to us in periods where there is a changeover in markets and market sentiment, change over in big themes that go on and they look to us for help on that. And so I think our distribution, our sales and marketing is really helping clients in helping to work with our clients, partner with our clients to think about how we can drive -- help them drive to further success in their business.

And the third area of focus for us goes around the infrastructure, making sure that you're building infrastructure, not for what you need today but also about all the opportunities for growth. So building the infrastructure you need to support the long-term growth that you expect in your business. So that's everything from operations, technology and other areas.

So I think those are the three areas we've been focusing on with the existing business. The other areas, as you know, I mean, we are big in the areas that we focus. We are strong in the areas of relative value, quality and factor quant. I think there's plenty of other strategic opportunities that will arise for us across the alternatives business, across the wealth management space and others that we're spending time thinking about in this environment and looking for opportunities.

[Devin Ryan, JMP Securities]

Terrific. Thanks for the thorough answer. Appreciate it guys. I will hop back in the queue.

[Kenneth Jacobs, Chairman and Chief Executive Officer]

Great.

[Operator]

We'll take our next question from Steven Chubak with Wolfe Research. Your line is open.

[Kenneth Jacobs, Chairman and Chief Executive Officer]

Hi Steven.

[Steven Chubak, Wolfe Research]

Hi, good morning Ken. So I did want to ask about some of the comp ratio comments. You noted you're still committed to getting back to the 55% to 59% target comp ratio. It sounds like you're hoping to get back to that range possibly as early as 2024 assuming a more normalized revenue environment. And just wanted to confirm first, whether that's the right interpretation? And second, what level of normalized revenue will be required to deliver such an outcome on this pro forma lower expense base.

[Kenneth Jacobs, Chairman and Chief Executive Officer]

Great question. So -- and that is the thought process that actually went into what we're doing. First, again, to repeat, one of the things that really compelled us to take action now is when we thought about the inflation in expenses in our business, partly to do -- partly to do some of the headcount increases and the likely revenue trajectory of our business, particularly the advisory business over the next couple of years or so, this was a necessary thing to do because if we had gone back to 2020 or 2022 revenues, and we had the 2022 cost base going into 2023 with that kind of inflation, we would not be within our targets. And so the goal here is if you think about revenue somewhere in the 2020 or 2022 range for the advisory side, then you start to see how we can get back to our targeted ranges on comp and non-comp and what ultimately ends up this margin.

And then, of course, it's the mix between the businesses, between advisory and asset. What's interesting about this is this could turn out to be a little like the period '09 to '13, where asset kind of leads the recovery because the markets and that flows through to P&L quicker than the announcements going up and then the completions do on advisory. So I would kind of keep that in mind as we go through this, and that's how we're thinking about it. What is normalized revenue environment? I guess I would say it's not 2021. I don't think we're going to be repeating 2021 as an industry for a while. I think individually as firms, we could, but I think that's not something that the industry should count on as a whole. My guess is it looks probably more like '18, '19, '20 maybe '22 as being more normalized kind of years.

But this is the conundrum of the advisory business. It's a very difficult business to predict in any given year. You know what happens over the long run with regard to the advisory market, it's kind of a 4% GDP plus growth business. But you don't know any given year, it can move as we see 30%, 40%. And so the cycles are pretty big.

[Steven Chubak, Wolfe Research]

Thanks for all that color Ken. And just for my follow-up, the tone on the environment, admittedly that you just conveyed, it's much less sanguined than what we've heard from some of your bulge bracket tiers, which are arguably better comps for Lazard, have a similarly global footprint. Want to understand whether there are any idiosyncratic factors that would result in weaker performance at Lazard relative to some of the bulges? And what are some of the macro factors or indicators that could potentially support inflection sooner than what you can be?

[Kenneth Jacobs, Chairman and Chief Executive Officer]

Okay. So a couple of points on that. One is when I look at the actual advisory revenues of our -- what I'd say, money center peers, so Goldman, Morgan Stanley, JPM, Citi, BofA and then I look at the independents. Candidly, most people -- there are exceptions in there, but -- most people have acted within a few points of the market one direction or the other. Some a little worse, some a little better, but it's been kind of market performance there. So I'm not sure you can make those distinctions right now, number one.

Number two is, I think the piece of the business that could turn for us sooner than the market turns is restructuring. As I said earlier, what's unusual about this cycle is usually when we see this kind of downturn in M&A, it's offset or muted by an upturn in restructuring, almost simultaneous or even proceeding. Here, it's been delayed. So I think what we could -- what could happen towards the end of this year is we start to see restructuring revenues coming through before the market recovers and such. So that should help a little bit for those that have restructuring practices.

And then what could change? Look, I think the biggest issue out there right now is just the inability to kind of predict the future that is people don't really have a lot of conviction and confidence about their ability to convict -- to predict the future. Now what's funny about that is they were totally wrong in 2021 when they were so bullish and were -- had real conviction. But that's where we are. And it's difficult for people to allocate significant capital in that kind of environment, whether you're a company or you're a fund manager. And so I think until we have more clarity and consensus about the environment, we're not going to have a real recovery in volumes.

That said, you could see how the environment could recover. We get through the debt limit without a crisis. We start to see a trajectory in the macro environment, which there's some kind of consensus on inflation coming down, small recession, big recession, Fed abating interest rate rises. I mean, all of that could come together pretty quickly. And if it does, I think you could see the financing market stabilizing, spreads narrowing a little bit, assuming it's not a huge recession and more activity. But right now, we still have this very cloudy, lack of conviction, lack of consensus environment.

And even if you do get this pickup, it's going to still be at least on the advisory side, several quarters before you see the announcements come through as completions, and I think that's going to put stress on people's revenue during that period of time.

The flip side of it is asset management could really outperform in an environment like this because if you don't get a hiccup in equity markets, particularly the way we're positioned, particularly in some markets outside of the U.S. right now, you could have some pleasant surprises there.

[Steven Chubak, Wolfe Research]

Helpful perspective Ken. Thanks so much for taking my questions.

[Kenneth Jacobs, Chairman and Chief Executive Officer]

Sure.

[Operator]

We will take our next question from Matt Moon with KBW. Your line is open.

[Matt Moon, KBW]

Good morning. Just wanted to drill down on the environment and maybe what you're seeing between the strategic and sponsor community in more detail. On the one hand, it seems that sponsors are seeing a slightly higher level of degradation versus strategics. But as you note, they should be quicker to return to market. So just curious on your updated thoughts here. Yes, would just love to…

[Kenneth Jacobs, Chairman and Chief Executive Officer]

So let's start with strategics. One complicating factor in the strategic market is the really big deals that have a lot of overlap are in a pretty difficult and I trust environment. We just saw the activation deal -- the problems with the activation deal in the U.K. And so that kind of -- and that's been the case now for several years. So this isn't a new factor, but there is some -- there's obviously going to be reticence on pulling the trigger on really big deals where there's a significant antitrust component.

That said, within sectors, you're still seeing some strategic activity amongst bigger deals. We're involved in as an example, in the Newmont Mining situation. There was a big water deal that we did recently and such. So there's some activity there. And I think for strategics that have strong balance sheets, as we've seen in every cycle where there's a downturn, they remain active. They're not as active as when you're in a period of massive optimism, but they remain active. The area where there's continued strategic activity, I'd say, is in the kind of $1 billion to $5 billion deal segment where you're not sort of betting the company and in industries where M&A is kind of R&D and growth.

And so you're seeing that in the pharma sector with biotech, you continue to see that in the renewable sector. We see some in tech, although that's complicated at the moment because of antitrust. And we're seeing an enormous amount of activity in the big sector just because of the strength of our FIG practice -- the strength of our FIG practice. So those have been good areas for us.

And then what's interesting about the consumer sector every now and then there's a big countercyclical deal in the consumer sector because it's defensive. They have strong balance sheets -- valuation is a little muted, so you can get things done there. So I think that's the strategic landscape. Not terrible, but it's not going to be like it is in a bullish environment.

On sponsors, I think you hit it on the head. It's probably the area that could recover the quickest, and you can see the pull-through into P&L the quickest. On the other hand, we're in a very different environment for sponsors today than we were in the period through 2021. We're in an environment where interest rates are going to be elevated for a period of time. They're not going back, I don't think, to 0 or 1% interest rates. I think spreads are going to be a little bit wider. And so consequently, financing more expensive.

And as a result of that, valuation is probably more -- a little bit more challenged, leverage into the companies, probably a few returns. And so the returns are going to be a little bit more difficult. But that said, there's still a lot of capital out there. It's incredibly inventive industry, very, very creative. And the sources of private capital that are available probably provide some fuel for activity even in a very muted environment as we've seen.

But the deals for sponsor is probably smaller in this environment. In some cases, that's a function of the fact that people will put up 100% equity in a deal just to say we'll refinance it later. We've seen a little of that and in some cases, and also just in terms of financing, it's easier to finance the smaller deals and the larger ones at the moment. But activity is muted.

[Matt Moon, KBW]

Great. And then just shifting gears for my follow-up to the asset management side. You guys obviously executed a smaller kind of modest-sized acquisition in March of Truvvo while also simultaneously combining the existing private client offering you guys had to create the Lazard family office partners. I know it's a smaller part of AUM base, but just curious if you're seeing any recurring and ongoing opportunities for the private client side of the business specifically? I'm just kind of thinking in the wake of the banking crisis that affiliated bank model for private clients, if there's anything there or if that's more outside the area of focus for you guys?

[Kenneth Jacobs, Chairman and Chief Executive Officer]

Evan, do you want to kind of size that and..

[Evan Russo, Chief Executive Officer, Asset Management]

Yes. As you mentioned, we formed Lazard family office partners with the acquisition of Truvvo earlier in the first quarter and we put that alongside our existing private client business. We've always had a very strong private client business in the high net worth space here, the direct business here. And the combined business now in the U.S., approximately $8 billion of AUM. We're very excited to bring on the new team and to really form this new entity to chase the -- and sort of building a much broader practice across the wealth management space.

Look, it's really augmenting what we've always done. I think when you think about the movement around what's going on in the financial space today, there certainly is a lot of movement, and that's partly why we thought about thinking about this channel as one that we should continue to grow. Obviously, we've had a large wealth management practice across Europe for a while now. And this was just a good opportunity for us to create a base to, to look at all the changes that are going to go on. We do expect there to be a lot of movement in the wealth management space over the coming couple of years, and this will give us another growth vector in that space over the coming years as well.

[Matt Moon, KBW]

Great, thanks, guys.

[Kenneth Jacobs, Chairman and Chief Executive Officer]

Yes.

[Operator]

We will take our next question from Ryan Kenny with Morgan Stanley. Your line is now open.

[Ryan Kenny, Morgan Stanley]

Hi, good morning. I wanted to follow up on the comment around wider spreads impacting deal financing. Can you give us some more color on how much wider spreads and credit conditions are playing a role in deal completion? Is it a bigger headwind than higher rate? And I'm asking to just try to get a sense of what's a better macro outcome, higher rates with no recession or a rate cut that come with a recession but also -- and also better credit conditions?

[Kenneth Jacobs, Chairman and Chief Executive Officer]

Well, look, I mean, I think the problem here is you've got a lot of cross currents. And so you sort of -- and navigating those cross currents is the challenge of this environment for anybody that's looking for financing. If we end up in a more difficult economic -- macroeconomic environment, one where there's a recession, my guess is spreads start to widen a bit. On the flip side, if we go in a recession, that probably is an expectation that the Fed is going to start to pull back on rate increases. So you have a rate environment that starts to improve a little bit.

On the -- another current is if you think about what's happening in the regional and the community banking sector with regard to deposit outflows and what that does to the ability to lend particularly into the commercial real estate sector in the SME sector, where the regional banks and the community banks are very important players that probably creates a bit of a credit crunch for people. On the other side of that, you have a huge amount of money in the private credit funds right now that start to become more active.

So you have all these cross currents. But the key here is just that risk capital is just a lot more expensive today than it was in 2021. And as a result of that, valuations are going to be depressed or what people could afford to pay for businesses is going to go down.

[Ryan Kenny, Morgan Stanley]

Thank you.

[Operator]

Thank you. This now concludes the Lazard conference call.