Lazard Ltd

NYSE:LAZ

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, and welcome to Lazard’s Third Quarter and Nine Months 2020 Earnings Conference Call. This call is being recorded. Currently, all participants are in a listen-only mode. Following the remarks, we will conduct a question-and-answer session. Instructions will be provided at that time. [Operator Instructions]

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

[Alexandra Deignan, Head of Investor Relations]

Thank you, Ally. Good morning, and welcome to Lazard’s earnings call for the third quarter and first nine months of 2020. I am Alexandra Deignan, the Company’s Head of Investor Relations.

In addition to today’s audio comments, we posted our earnings release and an investor presentation, which you can access on our website at www.lazard.com. 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 measures is provided in our earnings release and investor presentation.

Hosting our call today are Kenneth Jacobs, Lazard’s Chairman and Chief Executive Officer; and Evan Russo, Chief Financial Officer. They will provide opening remarks, and then, we will open the call for questions.

I will now turn the call over to Ken.

[Kenneth Jacobs, Chief Executive Officer]

Good morning. Our third quarter results reflected strong performance across our businesses, as Financial Advisory and Asset Management, both gained momentum. Our Financial Advisory results underscored the benefits of our diversified advisory platform. Our strategic and M&A activity accelerated even as our restructuring work continued at a robust pace.

In the third quarter, Lazard’s global announced M&A volume increased 64% year-over-year, compared to the market’s increase of 38%. Over the first nine months, our volume rose 5% even as the market’s volume declined 24%. Our strong and established footprint in Europe helped drive the gains as our European M&A announcements rose significantly in the third quarter.

Our preeminent global restructuring practice had a strong third quarter as we continue to be engaged in a wide range of complex assignments for both debtors and creditors. Year-to-date, Lazard is number one in the lead tables for both announced and completed restructurings.

Our Sovereign Advisory practice is also key in increased activity as we work with governments to restructure debt and strengthen balance sheets. In the third quarter, we completed restructurings for both Argentina and Ecuador and we continue to gain assignments from countries facing unprecedented financial challenges.

We continue to see growth opportunities across our advisory businesses. Year-to-date in Financial Advisory, we’ve brought on twelve new managing directors globally. This includes the last week’s recruitment of a London-based team with expertise that complements our capital markets and Shareholder Advisory practices.

Our Asset Management business benefited from strengthening global markets in the third quarter with average assets under management increasing 8% sequentially from last quarter. Gross flows continue to be strong and we achieved net inflows in August and September. Net inflows have continued this month reflecting demand across our platforms.

We are advancing in areas where we see high growth potential including strategies focused on sustainability and ESG, quantitative investing and alternative informatics strategies. We recently announced the addition of Thematic teams to our Global and Emerging Markets platforms and a Long/Short Credit team on our Alternatives platform.

We continue to see new strategies and launch funds to meet investor demand. We are also seeing an increase in solutions-oriented mandates as we serve more clients with customized strategies.

Firm-wide, our results underscore the strength of our diversified business model, global platform and a deep culture of client service. Our clients are dealing with unprecedented challenges and uncertainties caused by the ongoing pandemic and we are providing with expert advice and innovative solutions.

Evan will now provide more color on our financial results, then I’ll comment on our outlook.

[Evan Russo, Chief Financial Officer]

Thank you, Ken. Lazard’s third quarter operating revenue of $569 million was our strongest quarter of the year as both of our businesses gained momentum. Financial Advisory third quarter operating revenue of $307 million was 1% higher than last year on increased M&A and restructuring activities reflecting an acceleration in the business.

This quarter’s M&A revenue included announcement fees and completion fees for several transactions that were announced and closed during the quarter. Restructuring revenue reflected the continued high level of activity in our global practice.

Asset management operating revenue of $261 million was 8% lower than last year, reflecting lower average assets under management, as well as an impact from product mix shift as flows trended towards quantitative and fixed income strategies.

Average AUM for the third quarter was $226 billion, 8% higher than the second quarter of this year and 3% lower than a year ago. We finished the third quarter with AUM at $228 billion, 6% higher than the start of the quarter. The increase was primarily driven by market appreciation of $9.5 billion and positive foreign exchange movements of $3.7 billion with net outflows of $22 billion.

The quarter’s net outflows were driven primarily by local and emerging markets’ equity strategies. We achieved net inflows across our fixed income platform, as well as in our global and multi-regional equity platforms. As of October 23rd, our AUM was approximately $234 billion, reflecting market appreciation of $4.7 billion during the month, positive foreign exchange movements of $1.2 billion, and net inflows of approximately $0.6 billion.

Looking ahead across our franchise. In Financial Advisory, increasing M&A announcements had high levels of activity across our advisory practices, position us well going into 2021. In Asset Management, we continue to win significant mandates across our multi-regional and global platforms. We are seeing demand for both our quantitative and fundamental products across our platforms, as well as growing demand for our sustainable and customized solutions.

Turning to expenses. In the third quarter, we accrued compensation expense at a 60% adjusted compensation ratio, in line with our accruals year-to-date. Non-compensation expense of $103 million was 18% lower than the same period last year primarily reflecting a continuation of lower travel and business development cost.

Our adjusted non-compensation ratio for the third quarter was 18.1%, compared to 21.3% in the third quarter of last year. Our adjusted effective tax rate in the third quarter was 27.9%. For the first nine months it was 26.9%. We expect an annual effective tax rate for this year in the low to mid-20% range.

Regarding capital allocation, our business continues to generate significant free cash flow, which supports our goal of returning excess capital to shareholders. Throughout the year, we have been consistent in returning capital through our quarterly common dividend. In the third quarter, we returned $50 million of capital to shareholders.

Yesterday, we declared a quarterly dividend on our common stock of $0.47 per share. Lazard’s financial position remains strong with ample liquidity and balance sheet flexibility. As of September 30, our cash and cash equivalents were $1.1 billion.

Ken will now conclude our remarks.

[Kenneth Jacobs, Chief Executive Officer]

Thank you, Evan. I will provide some perspective on our outlook and then we’ll open the call to questions. The global macroeconomic outlook continues to be uncertain. The shape and pace of economic recovery will depend in large part of the course of the pandemic, its impact on local economies and ongoing government responses.

Nonetheless, corporate strategic activity is growing and capital markets have been resilient. Our conversations with clients are constructive and we are cautiously optimistic that the momentum in both our businesses will continue.

In Financial Advisory, the economic impact of the pandemic continues to drive disruption unevenly across sectors. Well-capitalized companies are seeing opportunities to strengthen their competitive advantages through strategic activity. Private equity, sponsors are increasingly active as both buyers and sellers, financially challenged companies are looking to divest assets or restructure and there is reason to expect restructuring activity to pick up in 2021.

In Asset Management, we see evidence that dislocations in markets and the dispersion of returns resulting from the pandemic are creating stronger demand for asset management. This, combined with investors’ desire for customized solutions and sustainable portfolios should continue to drive demand for our services.

Lazard is well positioned in this environment with a diversified business model, a global client base and unrivaled expertise in M&A, Strategic Advisory, restructuring and asset management solutions. We remain focused on serving our clients well while we manage the firm for profitable growth and shareholder value over the long term.

Now let’s open the call to questions.

[Operator]

[Operator Instructions] We will now take our first question from Richard Ramsden from Goldman Sachs. Please go ahead. Your line is open.

[Richard Ramsden, Goldman Sachs]

Hi, good morning guys. So, I am hoping to start a little bit with what you are seeing in the European M&A market. I know, if we look at the aggregate data, it hasn’t picked up effectively as what we have seen in the U.S.

Can you talk about why you are that’s the case and whether you see anything on the horizon that’s changed that? And then, perhaps as a follow-on, your [Indiscernible] with shutdowns across Europe as COVID rates increased. Do you think that will have a material impact on the existing cuts that you have included in your ability to close those deals?

[Kenneth Jacobs, Chief Executive Officer]

Okay. Two parts for the question. First, Europe, obviously, in the U.S. we have seen a quicker acceleration of large deal activity over the course of the last couple of months or so. But there has been a steady pace of – what I’d describe as medium-size transactions in Europe really since June or July.

We haven’t seen the very large trends – as many of the very large transactions as we’ve seen in the U.S. but it’s been a steady pace of activity at least for us during this period of time.

As far as the closings are concerned, I guess, there is two different parts to that. The first is, I think all of us have adapted well to the more restricted environment. Deals are being done effectively virtually and have been in the U.S. largely since M&A activity picked up and the same for Europe. So, the ability to complete deals such as people are in confinement.

We don’t see that much of a change as a result of that. There may be some complexity around some of the government approvals if actually people aren’t going into government offices to get these approvals. But so far, we haven’t seen much impact from that.

In terms of deal activity, look, the differential impacts on economies obviously has impacted on deals, but again, one of the features of this environment is, that most of the deal activity we’ve seen to-date has been driven by the fact that the companies that are engaging this activity are able to have a little bit better ability to – but I’d say, have confidence in their predictions about the future.

And that’s gotten them confident in terms of their ability to both price and manage transactions and that’s where you’ve seen a lot of the activity, technology, biopharma, areas where you have companies that are winning, because of the environment, because of technology. I think I should add probably financial services. Those are areas where we’ve seen a pick up on activity.

That probably doesn’t change too much with the closings. I think where the closings are going to have an impact is on companies that have kind of pushed out financing or while they are waiting for their business models are pushed the financings in place. But their business models are – that there is a recovery of their models are being pushed out because of the second wave or additional wave to the pandemic.

Those businesses are going to have a harder time and that’s where we are likely to see a pickup in restructuring activity. And we are already seeing that in Europe right now.

[Richard Ramsden, Goldman Sachs]

Okay. And then, perhaps as a follow-on, could you talk a little bit more about the restructuring business? I think I am right in saying that if we go back and look at the last crisis, restructuring was around 30% of your advisory revenues. What do you think the peak this time could be in terms of contribution to advisory and based on the pipelines, when do you think restructuring revenues will peak?

[Kenneth Jacobs, Chief Executive Officer]

Well, that’s a great question, because, a lot of it has to do with what happens with M&A activity, because, obviously, to the extent that there is little M&A activity, restructuring is going to be a much bigger proportion of the Financial Advisory revenues and to the extent that, M&A activity accelerates, it’s going to be as a percent lower, but in terms of absolute terms, maybe higher than it was in the last cycle.

What we are seeing right now – what we’ve seen so far is a high level of restructuring into – in the first part of this year driven by companies that were already in difficulty prior to the pandemic. Those companies, the restructuring or of those companies accelerated with the onset of the pandemic, they were – they had a difficult time getting additional financing.

Their business models were immediately challenged by the restructuring. Oil and gas, retail has been two great examples of that and that was the first wave of restructuring activity. We saw a slew of companies that were highly leveraged whose business models were a little bit more resilient at that point, gets financing in the first age of the crisis through the liquidity of the markets, some extent from governments both here in and Europe.

The crisis is probably gone on longer than that financing will last and the business models haven’t recovered. That is likely going to be the second wave of restructuring and we are starting to see that pick up in Europe right now. We didn’t see much in the first wave in the Europe, but we are starting to see those companies start to – have been each restructured now.

And with the lack of stimulus in the U.S., the depth of the pandemic now in the U.S we are likely to see a pickup in activity in the second wave in the U.S. So, this is a restructuring cycle where the restructuring levels in absolute terms for the first part of this year have been high and our guess is, we’ll continue to be at that level through the end of this year that’s the roll off of the first set of restructurings.

And then the robustness that we see a second wave of activity which I think we are beginning to see in fact the first wave in Europe now. And then we would expect to start seeing the second wave of activity in the U.S. that’s fall into the winter absent some kind of strong recovery and/or another round of very strong stimulus. But in any event, in couple way it picks up.

And then, the unusual feature of this environment where we have a high level of restructuring activity is the acceleration of M&A activity at least for our business we’ve seen - we saw a real acceleration in the third quarter in announcements and closings and we expect that likely continues into the fourth quarter or the early part of next year and then we’ll see what happens.

[Richard Ramsden, Goldman Sachs]

Okay. Thank you very much. That’s very helpful.

[Operator]

We will now move to our next question from Michael Brown from Keefe Bruyette & Woods. Please go ahead. Your line is open.

[Michael Brown, Keefe Bruyette & Woods]

Great. Thank you, operator. So, I just wanted to start with the inflows. I just wanted to confirm and did you say the inflows was $0.6 billion? Is that correct?

[Kenneth Jacobs, Chief Executive Officer]

Yes, that’s correct, Mike. $0.6 billion as of the end of the last week for the month of October.

[Michael Brown, Keefe Bruyette & Woods]

Okay. Great. And where are you kind of seeing those looking forward just trying to get a sense of where you are seeing some of strengths on flow side? And any color as to how some of those mandates that you won? How those are starting to flow in and then what’s kind of driving the net inflows that you are referencing? And is there potential for that to continue throughout the quarter?

[Evan Russo, Chief Financial Officer]

Sure. So, Mike, as we called out the end of last quarter, we started to see significant activity. We called out, we had a significant backlog of unfunded mandates that we had won for our business spread across really the entire platform and you started to see that come across in August and September of the monthly flows which were positive for us and continuing into October where we have even more accelerated net inflows as of the week ago for the month of October.

So, yes, it’s a continuation of the theme that we started to see at the end of last quarter as we were building that unfunded pipeline. I’d say that the continuation has continued for us really over that period of time and it’s really spread out across a whole slew of areas. There is no one specific – there is no one specific area that we got to see it.

We had net inflows this quarter as we called out in our international strategic net flows positive as well as in our quant and of course in our global converts business, as well. So, these are all areas that are performing well and seeing significant flow traction. But it’s really broad in there, I mean across all of the areas across, all of our platforms, I mean, it’s really very much spread.

And that’s what gives us a bit more confidence, because it’s not just one mandate or one large mandate or one specific strategy that’s doing well. It’s been pretty broad based in a lot of different areas.

[Michael Brown, Keefe Bruyette & Woods]

Okay. Great. And then, just wanted to talk about the comp ratios on – it looks like you are running at 60% year-to-date.

I guess, one, is that kind of a fair expectation for the year? And then, as we move into 2021, and operate some – even better revenue picture and so, against that assumption, is it possible to kind of move back to your target range of 55% to 59%, what you believe is going to be the target for – through the cycle?

And I guess, is that’s still your target range? And I guess, at what point would it be possible to kind of drift back to something like a 55% comp ratio. Is that still a feasible target given your revenue mix, the competitive landscape, I am just trying to understand is that’s still a fair way to think about your business kind of longer term through the cycle? Thanks.

[Evan Russo, Chief Financial Officer]

Yes. Sure. Let’s start with the first part of the question, Mike. So, third quarter we accrued competition at 60% that’s where we’ve been accruing all the year. I guess our best estimate for the year, but obviously we’ll continue to develop as we see these final revenues and sort of what hits the end of this year. So it’s obviously very revenue-driven. There is also a lot of factors as you know, that go into the final comp number.

Obviously, the business mix for us, the geographical mix of our business, the marketplace for talent, these were bottoms up as we only say it’s the bottoms up at year end and then a lot of components that could move that around. But 60% is our best estimate at this point in time. It’s obviously important to remember, as early we pointed out, we are a firm of intellectual capital.

Our people are the critical assets of our firm and our growth is built on hiring and retaining that hot talent. So, as we’ve always done, we are going to continue to focus on incentivizing our top performers and while continuously thinking about balancing and how balance short-term and long-term outlooks.

To the second part of your question, when I think about the sort of longer term, we have been managed with discipline for a fairly long time – almost the long ten years been in the range that we’ve set out at the mid to high 50s, 55% to 60% area where we’ve been accruing compensation and rewarded basis during that period of time.

I think what will drive that, next year is going to, first and foremost, as it always is, is the pace of revenues. And so, as revenues grow, as you get some revenue growth in the business, the natural growth in the business, that’s going to help us to remain in that range where we’ve always been. So, I think we are still fairly comfortable with the steady state business comfortable being in that range.

Obviously, a lot of factors that changed that the biggest historically has always been the pace and level of investments that we are making in the business and as we continue to think about where we see opportunities for bigger growth longer term and the investments we want to make there, that could have an impact on our compensation line.

But the steady state part of our business, given where we’ve been, I think we’re comfortable with that range. You said, when do we get to the lower part of the range, we were there just a couple of years ago, I mean, during periods of stronger revenues. So I think we’ve proven that when strong revenues come we are able to stay at the bottom part of that range as weaker revenues are going to trade the entire part of that range.

But we’ve always sort of managed that whole process with the discipline that’s of course focusing on incentivizing our talent and making sure that we can continue to invest in the business and focus on the growth of the business over the long-term.

[Michael Brown, Keefe Bruyette & Woods]

Okay. Great. Appreciate all the color Evan.

[Operator]

We will now move to our next question from Devin Ryan from JMP Securities. Please go ahead. Your line is open.

[Kenneth Jacobs, Chief Executive Officer]

Hi, Devin.

[Devin Ryan, JMP Securities]

Hi. Great. Good morning everyone.

[Kenneth Jacobs, Chief Executive Officer]

Good morning.

[Devin Ryan, JMP Securities]

First question here just on the M&A recovery, and really what I am trying to get at here is, the drivers behind it and kind of what you guys are seeing or thinking, really it feels like searching, quaking and strong snap back which I also think just speaks to how important strategic decisions right now just as the speed in the world continues to pick up.

And so, I appreciate there is some macro risks here and with the election next week and so there is obviously things that could temporarily disrupt activity. But it feels like it’s hard right now to hold back on M&A to given how critical it is in kind of strategic conversations. So, I just love to get some thoughts from you guys around what’s really driving activity and does that feel like a reasonable news this year?

[Kenneth Jacobs, Chief Executive Officer]

Yes. No, I think that’s a great question and I think your gist is just right. Traditionally, we look at M&A activity as the function of three factors, financing, equity market valuations and CEO and Board confidence and then usually there are a couple of longer term catalysts underpinning that activity. And it remains the same for us today.

Financing is widely available at historically low rates. And revaluations have been in some sectors kind of rich, others not. But generally speaking, the cheapness of the financings offset some of the valuation considerations in many instances. And then importantly, with regard to CEO and Board confidence, increasingly in industries where you see large levels or high levels of activity.

Those happen to be industries where Boards and CEOs have a better ability to have confidence in their predictions about the future and so, they are engaging in more activity. You don’t have to necessarily be optimistic, but you have to have some confidence in your predictions. And that - those industries has been technology, biopharma, increasingly financial services, some of the energy sectors and such.

And then there are other areas, I’d say fewer energy sectors. And then there are other areas where the stress on the economy is worth in the activity. That tends to be areas where there is real pressure on businesses where you’ve seen some activity. The catalyst for all this is best and we could tell are probably two-fold, a major catalyst is just that all the trends that were in place prior to the pandemic are being accelerated.

The industries which were - that are going to come out of the pandemic in a strong position, technology, biopharma, you are seeing a lot of activity there.

Companies which have stronger market position, stronger balance sheets probably are ahead of their competitors and in implementing some of the technological change that’s going on into their business models are also taking advantage of those positions to improve their businesses strategically through deals.

And weaker companies are having or finding that there is increasing pressure to deal with many of the challenges in their business through portfolio adjustments and frankly in many cases, restructurings. And then, there is a smaller trend, but an important one, at least as far as the fourth quarter is concerned, which is, there is some acceleration around – activity around selling businesses in anticipation and perhaps some changes in tax codes if there is a change in administration.

So, I think we are going to see some pickup in activity in the fourth quarter around that as well. And whether that persists into next year that rates to be seen, but I think the first catalyst is with us for quite some time.

[Devin Ryan, JMP Securities]

Okay. Thanks. I appreciate the color. And then maybe just a quick follow-up for Evan, just on the expense structure, you are thinking about kind of more holistically as we kind of get back into maybe a more normal business backdrop here and I appreciate some of the - non-compensation side, some of the expenses are kind of moving targets and your travel will likely pick back up.

But I am curious kind of how you think about or suggest kind of framing for us, kind of modeling out just given that you feel like travel will remain lower in the near-term and then, because we get back to something that’s more normal.

Is there still some overall, call it expense depreciation, just given that you guys have learned things through the pandemic around the expense base. So there is just going to be expenses that maybe don’t come back in full force?

[Evan Russo, Chief Financial Officer]

Yes, sure, Devin. So, as you said, in the quarter, our non-comp expenses were down approximately $22 million in the quarter and a significant part of that related to the marketing and business development expense with specifically a big chunk of that being travel and entertainment. So, $14 million of the $22 million is really related around that number around for travel.

So, look, I think it’s broader than just travel. I think we’ve been focused on thinking about expenses this year given the decline of revenues. We’ve been thinking about what kind of projects and other expenditures that we had this year making sure that we are making the right decisions in the context of the environment.

Of course, some of this is offset by some COVID-related expenses that we have in our offices, cleaning, PPE and then technology and some other areas. So, I think it’s still a moving target as to how that plays out.

I think, I’d say over time and what we saw in the third quarter, relative to the second quarter, as we started to see a little bit more in the travel side, a little bit more in the marketing and business development, I mean, it’s still slow, but it’s coming – it’s starting to come back a little bit higher than we had seen. But certainly nowhere near where were in the 2019.

But it’s going to depend on the – sort of the pace of the – the sort of normalization of the environment. We saw in Europe and Asia Pac region for us earlier in the third quarter when those businesses were going back to the office at a little more accelerated pace, client activity, and client interaction I should say, not activity, but client interaction was at a more normalized level.

We started to some pickup in those expenses. But ultimately, look, I think long-term, we would expect there to be some residual effects and benefits of learning to live in this sort of remote and virtual world. But it’s going to depend on the region. It’s going to depend on the clients. But ultimately clients are getting more comfortable – that have become more comfortable executing in this environment.

So there is definitely should be some addition fees, exactly that’s plays out at what pace it’s going to depend. But it’s important to remember, as well, that look, we are in a face-to-face sort of business, right. And face-to-face is critical in creating – and created the all environments during complex negotiations and certainly relationship building.

So, I would expect it to come back, probably not to the level that we were at in 2019 that quickly. But I’d expect that to have some residual benefit going out of couple of years as we think about it.

And then, look, outside of that, there is all the longer term implications on the real estate and other areas where, as we move into a more flexible working environment which is what we at Lazard are sort of thinking through and how to we work with our employees to figure out what is best, not only for our employees, but also for our clients sort of balancing the two.

I would think that’s going to take several years to really see through in the non-comp expenses. But I think over time, as we start to thinking out the next couple of two to four years, I think we can see the paradigms moving towards a more flexible working environment and therefore the need and type of space where we design reimagining the space we have is going to change.

Exactly what that means in terms of expense change, I think it’s little too early to PPD. We are in the early stages of thinking about this strategically, but I think as we’ve said before, I think long-term we want to take the best of what we’ve learned in this environment and figure out how to apply that and bring it forward with us as we sort of evolve to the future in a post-pandemic world.

[Devin Ryan, JMP Securities]

Okay. Thank you for all that color. I will leave it there. Thank you guys.

[Kenneth Jacobs, Chief Executive Officer]

Great.

[Operator]

We will now move to our next question from Brennan Hawken from UBS. Please go ahead. Your line is open.

[Kenneth Jacobs, Chief Executive Officer]

Hi, Brennan.

[Brennan Hawken, UBS Group]

Good morning, Ken and Evan. Hey, good morning. Thanks for taking my question. First just a clean up, you guys gave some great color on M&A and restructuring, but were there any pull forward revenues from October in the 3Q number?

[Evan Russo, Chief Financial Officer]

Yes, look, pull forward us, we don’t disclose the actual number. At this point, Brennan, I think this is more regular way. There is some transactions that closed in the beginning of Q3 that go into our Q2 numbers. There is some transactions that closed in the beginning of Q4 that will go into our Q3 numbers.

The difference really is material. It’s sort of a regular way at this point in time. But there was nothing sort of out of the ordinary in that respect.

[Brennan Hawken, UBS Group]

Okay. Great. Thanks. Then, when we think about the Asset Management fee rate, 3Q was a little bit softer than we were looking for given the sort of strength in equity markets. You guys spoke a little bit about demand dynamics and some shifting of allocations which seem to suggest that would make these third quarter fee rate a reasonably good one to use as adjusting off point.

I just want to confirm that that’s the case or whether or not there is any noise in the fee rate and based upon, what you are looking at as far as the pipeline goes, which as you talked about has really strengthened and you are much more optimistic about the flows going forward. How should we think about this fee rate in that pipeline? And how that might impact the fee rate going forward?

[Evan Russo, Chief Financial Officer]

Yes. So, Brennan, on fee rate, as we called out, a lot of this as we saw historically, we sort of expected to see this as the majority of it is really relating to the business mix, right. So, moving from some of the higher fee categories such as emerging markets being a smaller percentage of our portfolio relative to quant and fixed income in some other areas, which are lower fees, general strategies.

And so, that really is the reason for the decline. I think that, the majority of the decline. Look, there is always some deep pressure in our business as we always know. We continue to innovate which is the most important thing we can do at our business coming up with new product, launching new teams and new strategies across the platform.

I think going forward, I think it’s a reasonable sort of assumption to start using it. It’s going to move around as it has to go up and down a little bit based on that business mix going forward. But ultimately, I took a fair – I don’t think there is anything in that number specifically this quarter.

[Brennan Hawken, UBS Group]

Okay. Thanks for that, Evan. And then, in the Asset Management business, consolidation remains a theme to see just a steady drum beat of – not only activity, but pressure from activists, indications from CEOs of large diversified financial services firms looking to add scale to their businesses. You are of reasonable size in that business, but not huge.

So, how are you thinking about it? It really could go either way. I could see you guys using Asset Management and the excess capital that you generate in your business to go out and pursue more aggressively bolt-on transactions given the pressure that the business is under and the fact that smaller firms really are struggling more than ever and need to partner with us.

A firm that has good distribution capabilities and alike. And then on the other end, of course there are strategic alternatives as a seller. How are you all thinking about balancing those two right now? And how are you thinking about executing on that environment going forward from here at least in the medium-term?

[Kenneth Jacobs, Chief Executive Officer]

Sure. Great question. Look, it’s a fascinating environment. It’s probably a consequence of all the changes that have taken place around Asset Management over the last several years. And people and firms and companies and people are reacting to that now. From our standpoint, we have a great franchise, a great business that we’ve been investing in historically and we see an enormous opportunity to continue to invest in the business now.

Just in this quarter alone is an example which I think is really a reflection of what this environment is like right now. We brought on three new teams. Coherence Capital which is credit team, Bottom Billions, which is a medi team that complements our emerging market franchise and a Digital Health Strategy that complements our global kinetic platform.

So that’s just an illustration of the opportunities that’s out there and there is many more of a high net we’ve been pretty active over that over the last several months although it’s accelerating right now.

And this reflects the fact that as we’ve said, there were a lot of challenges for smaller and medium size platforms given the pressures around compliance, the pressures around cyber, the pressures around scaling to sell product, the gatekeepers have become more sophisticated for products. So having a more sophisticated platform or a more global platform to be able to distribute through becomes quite attractive and that creates a lot of opportunities for us in that landscape.

I think that we are going to be very thoughtful about the kinds of bolt-on larger transactions. We have to make sure that, if we do something, it’s heading to the value of the firm. And it also has to be something which we think is healthy business. It’s hard to fix businesses that are broken in the Asset Management.

And finally, the larger consolidations, look, those are things which as a steward of shareholder value, we always have to consider for both our businesses. And but at the same time, we are very comfortable with this mix of businesses and the two platforms to that.

[Brennan Hawken, UBS Group]

Great. Thanks for all that extensive color, Ken.

[Operator]

And we will now take our next question from Gautam Sawant from Credit Suisse. Please go ahead. Your line is open.

[Gautam Sawant, Credit Suisse]

Hi. Good morning. I just wanted to follow-up on that last question. On your Alternatives platform, are you seeing additional demand for firms to join that platform? And what is the outlook to be able to bring on, I guess, firms there and to help improve the fee rate with those firms coming on?

[Kenneth Jacobs, Chief Executive Officer]

That’s exactly what I was talking about in the last question. We are seeing a increased opportunity to bring on firms on to that platform. As I said, we brought on three this quarter alone. I think we’ve done five or six in the last year total. And our guess is we’ll continue to see more activity there.

Look, it’s – there is a lot of disarray in that market right now and that is an opportunity for us, but you have to sit through and make sure that the strategies we are bringing on are ones that we can be successful with. It’s– as they come with some assets which increase nearly – we’ve been able to do to make the economics more attractive. But we are seeing an increased flow there. And that’s something we are very focused on.

[Gautam Sawant, Credit Suisse]

Thank you. And just as my follow-up, on the Sovereign Advisory business, can you talk to how demand is picking up in different regions there? And how are you positioned to continue winning business and how does that help drive further business in these different regions?

[Kenneth Jacobs, Chief Executive Officer]

Well, I mean, this is obviously been a very strong platform Lazard has started and continues to be today, as you could see these, I say that we get the leading platform in a road in this area and we are involved in virtually all of the major assignments that are taking place in the market today. It’s an area where, unfortunately, the pandemic is having a disproportional effect on many of the developing countries around the world, which is putting pressure on their economies.

And as a result of that, pressure on their balance sheets of these countries and that’s going to drive increasing restructuring in the future. And I think that’s an area where we are highly focused and have a highly experienced team and should continue to do reasonably well over time.

[Gautam Sawant, Credit Suisse]

Thank you.

[Operator]

We will now take our next question from Steven Chubak from Wolfe Research. Please go ahead. Your line is open.

[Kenneth Jacobs, Chief Executive Officer]

Hi, Steven.

[Brendan O'Brien, Wolfe Research]

Hey. Yes. It’s Brendan O'Brien calling in for Steven. How are you doing?

[Kenneth Jacobs, Chief Executive Officer]

Hi, Brendan.

[Brendan O'Brien, Wolfe Research]

So, you guys already touched on this a bit earlier, but Europe is obviously been a month or two out of the U.S. in terms of COVID cases and lockdowns. How have dialogue sort of changed with CEOs and Board rooms in Europe over the last month as cases have sort of picked back up and lockdown has become more. And then, what is sort of the appetite for deals you have done or announced like, there and how they are back into lockdown?

[Kenneth Jacobs, Chief Executive Officer]

I am not sure that much has changed over the course of the last month in terms of dialogue with the CEOs in Europe. The dialogues continue apace. Deal activity through the last month has been consistent. We haven’t seen the very sharp drop-off that we saw in March and April. In fact, in a couple of markets, we’ve seen some acceleration over the course of the last month or so.

I think it remains to be seen what happens over the next couple of months as the lockdowns have gotten more severe in a couple of countries. So we are keeping an eye on that. The cross border activity I think hasn’t been as robust. Cross border as Transatlantic and also obviously from China hasn’t been as robust it has been in the past.

I think a lot of that is cross border into the U.S. It’s been probably dominated – it has been impacted by elections and political climates in the U.S. and obviously, tensions between China and the U.S. has probably limited a lot of anti-election need as well. But in the European midsize which is a lot of the financial sponsor activity in the sectors that I referred to earlier, you continue to see a reasonable amount of activity in Europe right now.

[Brendan O'Brien, Wolfe Research]

Right. I guess, sort of another follow-up. You just mentioned on cash flows and change and things of that nature, I guess, curious, what would be the impact of sort of the higher or minimum tax rate in the U.S. and you guys obviously benefited to lease on the way down. So what it’s going to be a similar – not has big of an impacts on the way back up. And also, how much of the sponsor activity do you feel sort of the pull forward from a potential change in the capital gains impacts us? Thank you.

[Kenneth Jacobs, Chief Executive Officer]

On the financial sponsor, let me take that and the tax rate impact I’ll also let Evan take. Financial sponsor activity, there seems to be a pickup in activity around the fourth quarter. We are trying to get some deals closed prior to year end as that seems to have picked up over the last – I’d say, several weeks or so.

My guess is that’s a positive blip, but probably doesn’t change the overall dynamics of the financial sponsor market that much because it’s such a robust market at the moment. And Evan, do you want to take the other?

[Evan Russo, Chief Financial Officer]

Yes. Sure, so, I think, as you pointed out, I think we would be a beneficiary on a relative basis, certainly of the tax reform where the U.S. tax rates goes up. Obviously the devil is going to be in the details there and we don’t really have a lot of information other than sort of a theoretical, maybe something like that and depending on what happens next week and a lot of – a lot of questions, a lot of maybes at this point in time.

But, yes, I would think this is an overall sort of 60,000 foot view. I certainly would take the view that that if you have tax rates go up, we’d certainly be a relative beneficiary of it given our current beneficial structure.

[Brendan O'Brien, Wolfe Research]

Okay guys. Thank you for taking my questions.

[Operator]

We will now take our next question from Jeff Harte from Piper Sandler. Please go ahead. Your line is open.

[Kenneth Jacobs, Chief Executive Officer]

Hi, Jeff.

[Jeff Harte, Piper Sandler]

Good morning, guys. Couple clean ups for me. As far as the diluted share count, I think last quarter you guys are talking about 4Q 2020 being something closer to 4Q 2019. But it didn’t change a whole lot this quarter. Should we still be expecting a big increase next quarter?

[Kenneth Jacobs, Chief Executive Officer]

Yes. Look, I think, it drifted up a little bit this quarter, Jeff. And I think our expectations would be that we are going to end the year somewhere in the same range as we ended Q4 2019. So I think that still holds today given that we bought back all the dilution we needed for yearend compensation earlier this year. And so, effectively took a share count down to ultimately drifting back up through the course of this year to last year’s level. So, essentially we’ve kept the share count flat year-over-year.

[Jeff Harte, Piper Sandler]

Okay. And in Asset Management, as we are looking at kind of the flow outlook, despite the obvious month-to-month volatility, I tend to think of institutional is being more stable directionally, kind of historically. It took a while for the outflows to work their way through the system. Now that we’ve reverted back to inflows again, should we expect kind of a similar persistent, it takes a while for the inflows to work their way through?

[Evan Russo, Chief Financial Officer]

Well, I’d say, the institutional business as we’ve always said, right, it’s a bit lumpy, right. You are going to get some times where things are going to come in and sometimes where they will flow down. I think ultimately, we are very focused and seeing a lot of great fund flows for us and win – mandate wins that we’ve had over the last few months that are sort of driving in towards growing our gross inflows for the quarter.

Our gross inflows continue to be strong. This quarter, gross inflows are certainly very, very important to us on a quarter-to-quarter basis. We got the right products. We got the right team, the portfolio management team. The products are really working their way through. So I think this quarter you kind of saw two themes here. You had gross inflows.

The inflow part of the equation going up because some of the unfunded mandates and Jeff, as you pointed out, our gross outflows are actually coming down on a relative basis. The only – in this time I think we were benefited on both sides of the curve with stronger gross inflows and lowering gross outflows at the same time.

So I think our outflow, as we’ve said we continue to be optimistic given what we’ve seen in the wins we’ve had and wins we are continuing to get the unfunded pipeline which remains fairly strong and quite diversified at this point. So I think our products are selling well in the market.

I think clients are – our potential clients, and clients are certainly eager to put some money to work in strategies like ours and they are really seeing the value of Asset Management today in today’s market more than they had in the past. So, I think these are all those factors sort of come together to kind of say that that hopefully, it’s lumpy. We can get some potential months and quarters where it could turn. But I think we feel pretty good about the business today relative to last couple of years.

[Jeff Harte, Piper Sandler]

Okay. And I feel kind of weird asking this close to the end of a recession as we are, but it comes out, cash is building on the balance sheet and the environment outlook is getting quite a better and improving. At what point do you consider kind of reinstating a more meaningful buyback or a potential dividend increase or just something along those lines?

[Evan Russo, Chief Financial Officer]

Yes. Sure, look, as we point out, Jeff, our cash has been building. We know that happens through the year. We accrue cash at this point as we start to gear up towards the yearend compensation. And also for potentially repurchasing shares to offset any dilution which we normally do at the beginning of the calendar year, so beginning of 2021.

Look, we’ve been a little bit more prudent in this market to be a little more conservative in this environment given a little bit of the uncertainty. So we are letting cash grow a little bit. Ultimately, I think our view is, we’ve bought back the number of shares we needed the minimum amount of shares that we wanted to offset the dilution this year.

We did it in Q1. We bought the shares back when the market sold off in late Q1. So we did enough to buyback what we needed for the year. Ultimately, I think we are holding on to the remaining, the excess cash and in future, additional repurchases will come from excess cash generation that’s going to be depending on the pace and the outlook of the business.

So we are going to keep moderating it. But ultimately, it’s likely to be limited for the rest of this year. But I would expect, Jeff, in 2021, as we are heading back to a more normalized environment if the business continues to strengthen, I would expect us to sort of resume our share repurchases at that point of time in 2021.

[Jeff Harte, Piper Sandler]

Okay. Thank you.

[Operator]

As there are no further questions, this now concludes the Lazard conference call. Thank you for your participation. You may now disconnect.