Lazard Ltd

NYSE:LAZ

Earnings Call Analysis

Lazard Q4 Presents Positive Trends Amid Challenges

Lazard reported a fourth-quarter operating revenue of $761 million, a 13% increase from the previous year, despite a full-year revenue decrease from $2.8 billion to $2.4 billion. The Financial Advisory sector saw a full-year drop to $1.4 billion but experienced an 18% uplift in the fourth quarter, signaling a market rebound with several major deals such as Iliad's merger with Vodafone. Asset Management revenue slightly dipped annually but saw a quarterly rise with AUM reaching $247 billion, influenced by market and FX appreciation. Adjusted compensation expenses rose to $1.7 billion with an elevated ratio of 69.8%, reflecting a focus on balancing talent investment and business performance. The firm remains committed to optimizing cost structures, with an effective tax rate adjustment to 14.5% for the year, and returned $330 million to shareholders through dividends and repurchases in 2023.

CEO Introduces Positive Outlook Despite Global Uncertainty

At the start of the call, Lazard's leadership highlighted the forward-looking nature of their statements, reminding listeners of the associated risks and the potential for actual results to differ based on various factors detailed in SEC filings. CEO Peter Orszag stepped in with a positive note, mentioning stable fourth-quarter results aligning with their long-term growth plans. Stressing on the turnaround of the M&A cycle, which is expected to continue into 2024, he indicated a well-positioned Lazard ready to face a stronger year, albeit acknowledging existing geopolitical uncertainties.

Board Strengthened with Expert Additions

Orszag welcomed the new members to Lazard's Board—former PayPal CEO Dan Schulman and Steve Howe, Ernst & Young's ex-U.S. Chairman and Managing Partner of the Americas. Their experiences as leaders and directors are intended to infuse fresh perspectives and contribute significantly to Lazard's strategy and governance.

Financial Advisory Silhouette Reflections

Mary Ann Betsch reported firm-wide revenue at $761 million for the fourth quarter, marking a 13% increase from the previous year. However, full-year revenue fell from $2.8 billion in 2022 to $2.4 billion in 2023, likely impacted by a decade low in M&A announcements and reduced completions. Fourth-quarter growth in Financial Advisory revenues, up 18% year-over-year, suggests improved client engagement. The U.K. and France offices recorded high performance, with the latter leading in market share for 2023.

Asset Management Navigates Mixed Tides

Asset Management's fourth-quarter revenue rose 6%, although full-year management fees only saw a modest 1% increase from 2022. Notably, Assets Under Management (AUM) increased to $247 billion—a combined effect of market and foreign exchange appreciation, partly undercut by net outflows. Client interest grew in equity strategies and fixed income solutions, evidenced by noteworthy international business wins.

Adjusted Compensation and Noncompensation Expenses on the Rise

The firm saw a higher adjusted compensation ratio of 69.8% for 2023, up from 59.8% before, attributed to a disciplined approach balancing various aspects, including market conditions and business performance. Lazard also reported a spike in noncompensation expenses by 10% year-over-year, driven by costs like C Corp conversion and incremented client activity expenses. Despite cost reductions anticipated from headcount adjustments, the firm recommits to key talent investments.

Improved Tax Position and Steady Shareholder Returns

A substantial dip in the effective tax rate to 14.5% in 2023 from 25.7% in the previous year improved the overall fiscal standpoint. To shareholder satisfaction, Lazard returned $330 million in 2023, comprising dividends and share repurchases. The company also announced the continuity of its dividend program with a quarterly dividend of $0.50 per share.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, and welcome to Lazard's Fourth Quarter and Full Year 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, Treasury and Corporate Sustainability. Please go ahead.

[Alexandra Deignan, executive]

Thank you, Todd. Good morning, and welcome to Lazard's earnings call for the fourth quarter and full year 2023. I'm Alexandra Deignan, Head of Investor Relations, Treasury and Corporate Sustainability. In addition to today's audio comments, we posted our earnings release 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, achievements or other events 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 include certain non-GAAP financial measures that we believe are meaningful when evaluating the company's performance. For 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 Peter Orszag, Lazard's Chief Executive Officer; and Mary Ann Betsch, Lazard's Chief Financial Officer. Peter will begin with some brief remarks before turning the call over to Mary Ann to provide an overview of our financial results. Peter will then provide his perspective on current market conditions and the outlook for our business.

After our prepared remarks, Peter and Mary Ann will be joined by Evan Russo, Chief Executive Officer of Asset Management as they open the call for questions. I'll now turn the call over to Peter.

[Peter Orszag, executive]

Thank you, Ale, and good morning, everyone. Our fourth quarter results represent a solid first step as we execute our long-term growth plans. Activity during the fourth quarter also reinforces confidence that the M&A cycle has turned a corner, as we indicated on last quarter's call. We remain focused on providing sophisticated and differentiated advice and investment solutions for our clients, and we are well positioned for a stronger year ahead. .

In addition to existing mandates, the quantity and quality of our dialogues suggest a productive 2024. At the same time, there is a high degree of geopolitical uncertainty that could affect business activity. I'll share more on our outlook shortly. But before I turn to Mary Anne to discuss our fourth quarter and full year results, I'd like to extend a very warm welcome new members of our Board of Directors announced earlier this week. [ Dan Schulman ], who most recently served as CEO of PayPal; and [ Steve How ], former U.S. Chairman and Managing Partner of the Americas for Ernst & Young. Dan and Steve brings broad experience as executives and directors of numerous public companies. We are [ excited ] for their leadership as we refresh and reinforce the strength of our Board and pursue our ambitions for Lazard.

Let me turn the call over to Mary Ann.

[Mary Betsch, executive]

Thanks, Peter. Today, we reported firm-wide operating revenue of $761 million for the fourth quarter of 2023, up 13% from the fourth quarter of 2022. Operating revenue for the full year 2023 was $2.4 billion compared to $2.8 billion for the full year 2022. Global M&A announcements in 2023 fell to their lowest level in a decade and completions were down 32% year-over-year. Our business was affected by the slowdown. The Financial Advisory operating revenue totaling $1.4 billion for the full year 2023 compared to $1.7 billion for the prior year. Fourth quarter results, however, reflects the continued positive trend of more constructive client conversations, resulting in an increased number of announced deals.

We reported Financial Advisory operating revenue of $477 million for the fourth quarter, up 18% compared to the fourth quarter of 2022. Examples illustrating this trend includes several large strategic transactions announced during the fourth quarter and in January, including Iliad's proposed merger with Vodafone, Western Digital Corporation's separation of HDD and flash businesses, Energy exemplars acquisition by [ Black ] and Vista Equity Partners, [ AbbVie's ] acquisition of ImmunoGen and the fees acquisition of [ inhibitors ]. Our advisory business had a particularly strong quarter and year. Our U.K. office had its highest quarterly revenue ever in the fourth quarter, and in France was largely linked to #1 in market shock for 2023.

Our co-heads of Europe's financial airy businesses are focused on integration and collaboration to capture cross-border opportunities and are demonstrating strong results. Our Private Capital Advisory Group has continued to deliver meaningful growth in client mandates and fee income, especially in our secondaries business as investors in private equity look for sources of liquidity amidst volatile M&A and public markets. In addition, we see increasing client demand in our global restructuring and liability management group. Client activity picked up significantly during the second half of 2023 in both the U.S. and Europe, and we see continued strong demand for our services, in part because we expect interest rates to remain higher for longer. We also continue to invest in our leading sovereign advisory business, and our team is well positioned to serve clients as they navigate this prolonged higher rate environment.

Finally, heightened interest from our clients in the geopolitical landscape remains and demand for our geopolitical advisory group services continues to increase as a result. Turning to Asset Management. Fourth quarter operating revenue was $274 million, up 6% compared to the fourth quarter 1 year ago and up 4% from the prior quarter. Management fees for the fourth quarter were up 5% compared to the fourth quarter 1 year ago and down 1% from the prior quarter. For the full year 2023, management fees increased 1% compared to the full year 2022. Asset Management operating revenue was $1.1 billion for the full year, 3% lower than the prior year reflecting lower incentive fees compared to 2022.

As of December 31, we reported AUM of $247 billion, 8% higher than September 30, 2023, and $0.14 higher than December 31, 2022. The sequential increase from September 30 was due to market appreciation of $16.9 billion and foreign exchange appreciation of $5 billion, offset by net outflows of $3.6 billion. Average AUM for the fourth quarter was $234 billion, an increase of 11% from the fourth quarter of 2022 and 1% lower on a sequential basis. Average AUM for the full year was $233 billion, 2% higher than 2022. During 2023, we saw positive net inflows across our global and European fundamental equity strategies, our quantitative platform and our U.S. and European fixed income strategies. In addition, our European and Asia Pacific distribution teams won significant new business, including mandates from a public pension scheme in France, UOB Asset Management in Asia and mid-wind Investment Trust in the U.K.

Now turning to expenses. Our adjusted compensation expense was $516 million for the fourth quarter and $1.7 billion for the full year 2023. Our adjusted compensation ratio was 69.8% for the full year 2023 compared to 59.8% the year prior. Our awarded compensation ratio for 2023 was in the low 70s. Going forward, we will no longer disclose this measure as we understand it was not considered useful by investors. Importantly, we remain disciplined in setting compensation each year, balancing market dynamics, business performance and continued investment in talent. Our adjusted noncompensation expense was $148 million in the fourth quarter, 4% higher than the fourth quarter last year. Our adjusted noncompensation expense was $572 million for the full year 2023, 10% higher than the prior year.

The year-over-year increase was primarily driven by increased occupancy and professional services expenses, including onetime costs such as our C Corp conversion. Travel and entertainment expenses were also a factor reflecting increased client and business development activity. We are on track to reach our target head count reduction, which was previously announced last April and is due to be completed by the first quarter of this year. At the same time, we continue to invest in talent in key areas. Cost savings related to our head count reduction will lag actual departure dates and as revenues normalize, we aim to return to our target expense ratios over time.

Shifting to taxes. Our effective tax rate for the fourth quarter as adjusted was 16% compared to 26.3% for the fourth quarter of 2022. Our effective tax rate for the full year 2023 was [ 14.5% ] compared to 25.7% for the full year 2022. Turning to capital allocation. In the fourth quarter of 2023, we returned $44 million to shareholders, primarily through our quarterly dividend. For the full year 2023, we returned $330 million to shareholders including $173 million in dividends, $102 million in share repurchases and $55 million in satisfaction of employee tax obligations. Additionally, yesterday, we declared a quarterly dividend of $0.50 per share.

I'll now turn the call back to Peter.

[Peter Orszag, executive]

Thank you, Mary Ann. On our last call, I said that the third quarter was a turning point both for Lazard and for the M&A market. Our fourth quarter results are consistent with that observation as we increasingly build momentum and execute against our longer-term ambitions for Lazard. Looking at financial advisory, interplay between headwinds and tailwinds continues to create favorable conditions for M&A activity. Tailwinds remain strong as business leaders look for opportunities to capture technological innovation, address global supply chain shifts and drive revolutions in life sciences and the energy sector. At the same time, the headwinds are increasingly subdued.

While it is increasingly clear that interest rates may be higher for longer, the debate has shifted away from if rates will go up to when they will go down. And now that higher rates have been in place for a longer period of time, we are seeing buyers and sellers better align on valuations. In addition, financing markets are opening up, private equity is becoming active again and more Boards and C-suites are willing to pursue transactions in the wake of some favorable antitrust decisions by court.

As a result, we are engaged in an expanded number of client conversations. We see stronger M&A activity across the U.S. and Europe and in a broad array of sectors, including technology, industrials, financial institutions, health care and energy, all of which are sectors where Lazard has deeply embedded networks and teams. We also see significant further revenue opportunities beyond M&A in our capital solutions, restructuring and liability management businesses. As leaders in markets expect higher interest rates for longer and ways of debt maturities approach, clients increasingly explore solutions across the various options our teams provide. To support this growth and further build our leadership in this space, over the past 2 months, we announced 3 new managing directors in our restructuring group, 2 in New York and one in London.

In Asset Management, we began 2024 with $247 billion in assets under management, approximately 14% higher than at the start of 2023. Positive market sentiment and a widening dispersion of returns across asset classes is leading to increased activity and interest across our range of actively managed investment products. In addition, [ Evan's ] strategic plan is focused on stabilizing and optimizing the business, which has helped produce improved results throughout the year. Our investment teams continue to perform well in this market environment. And we've seen significant outperformance across our emerging markets, global quant and select local strategies. We're also continuing to add talent to the business with senior hires to our small cap equity platform in the fourth quarter and a recently announced new head of our Japanese business.

During the fourth quarter, we provided specific goals for our long-term plan to double revenue by 2030 and deliver an average annual total shareholder return of 10% to 15% through 2030. In Financial Advisory, we are focused on high productivity growth. We are targeting an increase in average revenue per MD to $8.5 million by 2025 and $10 million by 2028. And net addition of 10 MDs each year through internal promotions and lateral hires. In addition to 4 new MDs recently hired, which underscores our ability to attract world-class professionals to Lazard, in January, we also promoted 10 new managing directors from within the firm, reflecting our long-standing strength in developing internal talent.

In Asset Management, we are focused on strengthening our traditional business while adding capabilities in less liquid products, primarily through inorganic opportunities. We are targeting approximately 30% of asset management revenue from alternatives or Private Markets and Wealth Management by 2030. We will evaluate and pursue acquisitions in a programmatic disciplined manner with a focus on creating value for our shareholders.

Let me now turn to the outlook for the year ahead. As we've shared previously, we expect 2024 to be better than 2023. We see continued signs of a healthy and strong economy and the tailwinds for M&A activity strengthening while headwinds abate. We also could experience an unusual environment in 2024 with increased M&A occurring alongside greater restructuring activity as rates remain high and debt maturities approach. We do note, however, that alongside these macroeconomic conditions, geopolitical uncertainty is increasingly top of mind for decision makers. I remain very focused on building a commercial and collegial culture to execute our ambitions pursuing a strategic path to achieving our Lazard 2030 goals and creating value for our shareholders.

To that end, we are pleased to have completed our conversion to a C-Corporation on January 1 as we embark on the year ahead and our next chapter, our complementary businesses, premier brands, established global leadership and extraordinary talent provide a strong foundation. Now let's open the call to questions.

[Operator]

[Operator Instructions] We'll take our first question from Ryan Kenny with Morgan Stanley.

[Ryan Kenny, analyst]

I have a big picture question for Peter on the Lazard 2030 strategy. And Slide 10 is really helpful in understanding the building blocks there. One of the drivers listed, and you've talked about this before is increasing relevance. Can you help walk us through what specific changes culturally you're making to make sure that Lazard is top of mind for CEOs and Boards?

[Peter Orszag, executive]

Sure. And relevance is important, not just kind of [ Boards ] on take, but because it then reinforces the brand and converts into revenue. So I want to make that clear. But there are lots of things that we are doing from increased presence externally. So getting our top bankers and thinkers out on -- in the media at conferences and so on to project the force of Lazard's insights and make it even more apparent to the world, the differentiated talent and insight that we have. We are doing a lot more convening events that bring together top CEOs and thought leaders into a place that into select places so that there are conversations that can occur that, again, are more than what one can get out of the new savers say.

And then we're building out new capabilities that increase our holds a great example of that is the geopolitical team. Clearly, as I said before, you can't make a business decision today without geopolitical considerations being taken into account, and we have a top-notch team that is helping our clients evaluate those questions.

[Ryan Kenny, analyst]

Okay. Great. And as I just think through wallet share, you're clearly focused on increasing productivity of MDs over time. You've also taken some actions to manage headcount. So when we put those 2 together, is the goal to keep your wallet share but get more efficient or to grow wallet share?

[Peter Orszag, executive]

Our goal is to increase our wallet share. We believe that's what will occur as we execute our Lazard 2030 goals, but to do so in a way that is not just buying wallet share, but doing so in a high productivity manner. And the reason that I just want to pause on is really important, which is as we raise our productivity for MD, the operating leverage that we get especially on the non-MD comp ratio is what allows us to then invest in new talent. So it's a self-reinforcing cycle that as we raise productivity, we free up room in our comp ratio to make new investments in managing directors. That leads to additional wallet share gains, additional relevance as we just discussed but doing so in a manner that still fits within our comp and margin targets.

[Operator]

Our next question will come from Devin Ryan with JMP Securities.

[Devin Ryan, analyst]

First question just on those head count reductions and the projected reduction of 10% in the run rate cost base by the, I guess, the end of 2020. Can you guys just give us an update on where we are on all those savings? How much of that was reinvested or will be reinvested back in the business just because there's a lot of moving parts on expenses and then also appreciate that 2024 might be a little bit of a transition year in kind of a revenue recovery. So just trying to think through some of the moving pieces and kind of what that could mean for maybe noncomp expenses in the absolute and maybe comp ratios on a relative basis.

[Peter Orszag, executive]

Sure. So I'll start and then maybe Mary Ann will point out. Look, let's cut through all the complexity because I think this is pretty simple. We are committed to our tradition, our long-term margin targets, both on comp and on non-comp. So on comp you should, again, just keep in mind that our goal is to return to those traditional targets of being in the mid- to high 50s on the comp ratio as revenue normalizes. So all the other pieces are contributors to that. We are on target for the head count reduction that we articulated early last year, which is a 10% reduction from the first quarter of 2023 to the end of the first quarter of 2024. That is tracking. But again, it's not done for the sake of doing it, but rather to help us on our transition back to those traditional margin targets. And that's what I think you should be tracking.

You're right also to point out that 2024 might be a transition year. It depends obviously, how strong the revenue environment is, but we are committed to getting back to those traditional targets over time. I don't know, Mary Ann, if you want to add.

[Mary Betsch, executive]

Yes. So the one thing, Devin, you mentioned non-comp as well. So I would just say that we've done a lot of work. We are continuing to look constantly for cost savings opportunities, we're sort of turning over every stone. And so if you look sort of at what to expect for 2024 versus 2023, we expect to continue to see inflationary pressure and increased travel, for example, occupancy costs tend to go up over time. But we really are working hard to keep expenses this year flat to maybe down a bit. So that's what I would expect there in dollar terms.

[Peter Orszag, executive]

The [ rate ] will come down that one.

[Devin Ryan, analyst]

Okay. Terrific color. As a follow-up, Peter, I think there's been a positive reaction to the C-Corp conversion and the decisive actions you guys took there. So kudos, I think that's shown through in the stock. Yes, I think the question I'm still getting is around the strategic and maybe financial merit as well the adviser the model with kind of advisory plus asset management. And I appreciate that's been the model. But as you continue to assess do you see scenarios where the businesses could be more valuable separated? Are you still evaluating that? I know you had said everything was on the table when you started. So I just would love to get an update on how you're thinking there? And is it still TBD? Or is this really kind of where we -- I guess, you made the decision on kind of the business model being combined.

[Peter Orszag, executive]

Sure. Well, the way I would put it is we see significant upside in both sides of the business. And so we're really focused on trying to create more value by executing on those opportunities, and that's the immediate task ahead of us. So on advisory, I think we've laid out a path involving a net addition of MDs and also raising productivity. On the asset management side of the business, it involves really 2 things. One is optimizing the traditional business by a focus on investment performance and also on upgrading our distribution team with the goal of some degree of growth because market appreciation, at least more than offsets the pressure on -- from fee compression and net outflows given the move to index funds in active management and liquid markets, combined with -- that's part one.

And then part 2 is pivoting and diversifying the business into less liquid parts of the marketplace where investors are increasingly allocating their money, and we see a significant opportunity for Lazard in that space. And that will be a focus of our inorganic activity going forward, which we're going to do in a disciplined manner. So coming back to your question, we see significant upside on both sides of the business. We also see opportunities for fully -- in a fully compliant manner with all the appropriate firewalls for additional connectivity and synergies between the 2 businesses, too. So we are focused on all of that. And I think that's the next several years of what we're planning to do.

[Operator]

Our next question comes from Steven Chubak with Wolfe Research.

[Steven Chubak, analyst]

Peter, a question on just the restructuring comments you made. You noted you're anticipating higher for longer rates certainly bodes well for the liability management business, in particular, was hoping you could just speak to your outlook for the business relative to an active '23 and how it could be impacted if we do begin to see a steady stream of rate cuts beginning in May or June of this year.

[Peter Orszag, executive]

Sure. So what I would say with regard to our business is we started off at least relative to the market/some of the competition a little bit slower in 2023 in restructuring. But as we approach the end of the year, activity for us picked up significantly. And that's what we're seeing coming into 2024. The team is very active. We're really pleased with the new additions, which I think gives us a lot more firepower in the sector. We're also seeing the kind of flywheel effect from the various different things that we're doing. So we -- just to step back for a second, we have been diversifying the team. Historically, as you know, we were very defocused. We now have a team that can very ably cover both creditors and debtors.

We also have been building out our connectivity with private capital. That is important because a lot more of the restructuring and liability management activity is -- it involves private capital and private equity. And there's definitely a feedback loop from our new Lazard Capital Solutions team to restructuring and liability management, also, frankly, our PCA fundraising business. We've got lots of different touch points now with private capital, and we're seeing that play through also. So it looks like, for now, we're seeing an uptick in overall activity. I think that may well be partly because we've reconfigured our team to be able to cover to be where activity is in a very constructive way. The new additions are welcome. And with regard to whether a rate decline will change any of that in 2024, maybe at the margin, but 2 things.

One is I think the market may well still be overly optimistic about when the Fed is going to start cutting rates and we can perhaps go into that if you'd like. But secondly, the rate reductions are going to be gradual. And so I think for a lot of 2024, the type of environment that we're seeing, especially combined with the wall of maturities that are approaching is going to lead to a lot of restructuring activity.

[Steven Chubak, analyst]

That's really helpful, Peter. And just for my follow-up, just a clarifying question around the revenue trajectory. Some of your peers have indicated they expect a slow build in fees in '24, just given the elongated deal and conversion time lines, I wanted to get a sense, given your strong backlog momentum, the tailwinds you cited in your prepared remarks and during '24, how we should think about the revenue trajectory over the coming year? And is the expectation it's going to be a little bit more back half loaded just given some of those elongated time lines?

[Peter Orszag, executive]

Well, I've spoken also before about those time lines. It does take time from conversation to announcement to completion. Each of those have -- and sometimes long lags between them. But we're moving through that process. So again, I think we're -- the market has definitely turned. With regard to the kind of within the year, typically, for example, the first quarter is not the strongest quarter of the year and things and often the fourth quarter is the strongest quarter of the year. So if you just looked at history, I think that would be a reasonable matter to project. And I guess, there's nothing we're seeing that suggests that, that typical historical pattern is not what to expect also in 2024.

[Operator]

Our next question comes from Brennan Hawken with UBS.

[Brennan Hawken, analyst]

I'd love to -- it's very helpful to hear your productivity targets. So I'd like to drill down on maybe how to think about MD growth. So you gave some color on hiring and promotes here recently. We see that the MD head count is already down recently from the 1Q level. I know that 10% wasn't about MDs and there's -- Mary Ann gave some color on the fact that there's still some flow-through to happen for headcount. But how should we think about that flow through on the head count number? And then how should we think about also the go-forward investing plans and any kind of like annual pace of net adds?

[Peter Orszag, executive]

Sure. So I think maybe in the starting base, you should project forward once we get through the year-end process of -- and some people who will be leaving Lazard actually doing so, you should start off in financial advisory at about 200 managing directors and build from there. And I think with regard to the piece in the sort of annual plan, I think you should expect, obviously, there will be variations from year-to-year, but we're planning and hoping to come in at around that 10 net add per year. It might be plus or minus a little, but depending on -- this is lateral hires, the matching function matters a lot, and we want to make sure that we're not just filling a quota on hitting a net out of 10, but rather getting the right people. So sometimes it will be more than that, sometimes it will be less than that, but I don't think the varying will be that significant per year.

[Brennan Hawken, analyst]

Okay. Great. Great. Yes, of course. But it will be around, but that's around -- yes, hopeful to get a rough idea. I would love to drill on expenses because given your efficiency efforts and some of the moving pieces here this year, how should we think about the fixed expense base going forward, what kind of a delta versus where you were in 2023? And how much sort of most importantly really, how much of these changes increased your level of operating leverage to an environment that seems to be improving?

[Peter Orszag, executive]

Yes. So I'll start and then maybe Mary Ann will come in. Let's separate them into the fixed costs into 2 components. In the noncomp category, I think you should think about noncomp being roughly flat in dollar terms, just coming back to some of the earlier commentary. That's a combination of some things that will respond to a stronger market travel and entertainment is a good example and other things where we think we could have some reductions in 2024. Professional services is a good example in that category. And then in the comp line, you should expect that fixed costs will go down as a result of the -- as the head count reductions materialize. And then clearly, the bonuses component will depend on how the business has performed throughout the year. And Mary Ann will sell in a little bit more detail perhaps.

But the important point is everything we're doing here is to make Lazard more efficient and to put us on the path to raising productivity because that is the way to get operating leverage, and we are pleased with the progress that we're making.

[Mary Betsch, executive]

Yes. I'll just add a couple of things to that. And then really focusing on the fixed portion of compensation costs which you've got a couple of different components in there, right? So you've got salaries, which we will expect to come down sort of as we see the effects of the head count reductions come through. You've got benefits, which for us are higher than most companies because of our presence in Europe, benefits and social charges. And so -- and those tend to vary with [indiscernible]. So there's some unpredictability there, but generally tend to go up over time. And then you've got amortization of prior year awards, which as high awards have gone up in the past that we see the effects of those in future years, as you know.

And the other element that is sort of impacting this year, in particular, is we've got a couple of pretty productive people who are becoming retirement eligible. And so you recognize their entire award in the year of the grant essentially because they've owned the whole thing and don't have to stay through the service period.

[Brennan Hawken, analyst]

Got it. And just -- sorry, Mary Ann, just to clarify, that comment on the retirement eligible, those are the new folks who are retirement eligible this year, so a delta versus what [indiscernible] was?

[Mary Betsch, executive]

That's right. That's right.

[Operator]

Our next question comes from Jim Mitchell with Seaport Global.

[James Mitchell, analyst]

Just maybe on -- you noted, Peter, that Europe was particularly strong this year. Can you talk about your outlook on Europe? How much of that strength was just your push for productivity and collaboration versus the environment? And how you're thinking about that in '24?

[Peter Orszag, executive]

Sure. So look, we have new co-heads of Europe on the advisory side, which is fantastic. That's -- I think if you go back to our Lazard's history, one of the questions always was the degree to which Europe was integrated were there. The co-eds are off to a great start. And we expect more to come from that structure as we move forward through time. With regard to the market, we're still seeing significant activity in M&A and in restructuring out of Europe. It may well be that part of the reason for that is that the macroeconomic environment is a bit more challenging in Europe than in the U.S., especially in Germany specifically but across the continent and to some degree in the U.K.

And so as companies see that more challenging domestic market -- they are looking for top line growth through inorganic options, including in other geographies, and that plays to our strength. I'd highlight again that among the independent firms, we really are the only one that has a strong presence in both North America and Europe. So to the extent that European firms are looking for North American targets, that's a natural fit with Lazard.

[James Mitchell, analyst]

Right. Makes sense. And then just maybe on the margin targets. You talked about getting productivity per MD up to $8.5 million by '25. Is that kind of the bogey you need to get to the 20% margin and comp ratio targets? Or just trying to triangulate what normalized you would mean for those targets?

[Peter Orszag, executive]

I think there are lots of ways of hitting the normalized targets, but the plan all fits together. And so we are aiming to accomplish all of that -- all of the things that we've set out, productivity targets, obviously, make it easier to hit the margin targets. But I wouldn't say it's not a necessary condition. It may be partially sufficient but not necessary. But we're planning on doing all of the above. So hitting the expansion in the number of MDs, the increase in productivity, which then helps the finance increase in the number of [indiscernible] and be very attentive to our comp and noncomp expense ratios as the market normalizes.

[Operator]

Our next question comes from James Yaro with Goldman Sachs.

[James Yaro, analyst]

I just wanted to touch on the asset management business and get your expectations for flows in the fee rate in that business over 2024 and maybe into 2025.

[Peter Orszag, executive]

I'll let Evan take that.

[Evan Russo, executive]

Sure. James, it's Evan. So look, flows, as we talked about in the previous quarter, we expected that flows will becoming more balanced overall for us, net flows in 2023 were significantly better than in previous years despite some of the headwinds that we've all seen in the market. We expect it to be choppy, continue to be choppy month-to-month, quarter-to-quarter, as you know, based on our business and certainly the first half of this year. A lot of that is driven by the fact that you still have a lot of money sitting on the sidelines, moved into the market or duration type instruments based on higher yields that people are getting. So it's a lot of money staying on the sideline that's drawing capital away from risk sets and putting new money to work. So there's a little bit less conviction that we saw and I think that the market saw generally in Q4 and into the beginning of this year by putting new money to work.

So that starts to come off the sidelines, which we expect to happen over the coming quarters ahead, we expect that to be a positive movement for us. We're seeing significantly, as Peter called out in the script, we're seeing growing interest in many of our global strategies, the quantitative platform and selectively in fixed income. I'd probably say it's a little bit earlier for us in the emerging markets. As part of the cycle, I think [indiscernible] still, as we said, sitting a little bit on the sidelines waiting for that opportune moment, waiting for the right timing to go back and reallocate into EM. As you know, the last probably 5 or 10 years, people started taking allocations down. So we see that as a potential growth option and we're definitely having more conversations with clients and allocators about the right timing of that transition back into that space. And that would obviously be a positive for us as well, but I would expect that to be playing out right over the next 12 to 18 months.

But overall, I think that's the strategy that we would see continuing to work in. I think from a performance perspective, we've had a significant performance across the portfolios with significant strength in many of those areas that I called out global EM, the quantitative platform. And so as markets broaden out from what we saw in the past years, we all know, the return performance beyond just 7 stocks, I think has moved more towards fundamentally driven markets or certainly will [ plow ] our strength and we're already seeing that in the performance that we've had in the emerging markets in many of our international strategies.

[James Yaro, analyst]

Okay. That was very helpful. Just one other one, which is on your buyback. I think the size of buyback was a positive surprise in the quarter, in my opinion. Maybe you could just speak to your updated thoughts on capital return priorities from here.

[Peter Orszag, executive]

I'll start, and then Mary Ann can look, moving forward, as I've said before -- well, first, to start with, we have 2 very cash-generative businesses as markets normalize. And as we move forward in time, we are going to be putting an increased emphasis on using that cash flow for the inorganic opportunities that we see in asset management obviously beyond the dividend. And so I would highlight, for example, we have a new Head of Corp Dev who is starting in the next 2 weeks as we add additional capabilities to explore inorganic opportunities that we see on this pivot and diversification of the asset management business. We are going to approach that in a very disciplined manner. And obviously, way that use of cash and that use of capital against other potential uses, including buybacks and deleveraging.

[Mary Betsch, executive]

A couple of points. James, just to clarify, my comments on buybacks were for the full year, and we did buybacks in the first quarter primarily, but not this quarter. So just to make sure that's clear. And then on the pace of buybacks going forward, as Peter just said, that's one of the uses of our excess cash, and we certainly plan to offset dilution from stock comp over time. I would just sort of note that the pace may be a bit uneven based on other opportunities that we have. So it's not great for modeling, but I would expect to offset, but not necessarily immediately or as quickly as we have in the past.

[Operator]

Our last question will come from Mike Brown with KBW.

[Michael Brown, analyst]

Peter, you mentioned part of the plan for the asset management business is to pivot and diversify into private markets. And understanding that this is going to be a multiyear process. But just wanted to hear a little bit more about that, what could acquisitions look like there? It sounds like it's early days. You mentioned that you just hired someone kind of corp dev side of the business. But -- how do you think about bringing on the right assets to scale on the Lazard platform while also paying the right price or it can be accretive just given the valuations in the space are certainly high in the private market side.

[Peter Orszag, executive]

Yes. So here's the way I would look -- I would sort of phrase that. We're acting with urgency but also discipline focused on obviously trying to find the right fit, not just making an acquisition for the sake of making one. I'd highlight not just price but cultural fit as being extremely important to making sure that the inorganic strategy and the programmatic M&A is its success over time. We're particularly focused on private asset managers with some degree of established track record that are still relatively early in their AUM progression where they could benefit from our prestigious brand in our distribution network, a global distribution network. And we benefit from their diversification of offerings and performance. And we see a lot of opportunity to acquire firms of this size and at this stage as they may be too small to move the needle at the very large alternative asset managers and too large to integrate into firms much smaller than we are. So there's a sweet spot for us, and we're going to, again, act with urgency, but also take the appropriate care to find the right match because we are fully cognizant of the risks of deals going astray or integration that doesn't work.

So you should expect, again, I use the word programmatic on purpose. We are going to do this over time. And we're going to wait to make sure we get the right match. But as soon as we see the right match, we are going to act decisively.

[Michael Brown, analyst]

Okay. Great. And just maybe one kind of follow-up on the advisory side of the business. You had mentioned in your prepared remarks that the private equity side, it is getting more active. What is that starting to look like at this stage? Is it still more about kind of the dialogues? Or are you starting to see things kind of falling into place? And if you think about historically, what would be the final hurdles here that would need to get that cohort to become more active?

[Peter Orszag, executive]

Well, let me say a couple of things. First, outside of M&A, we have lots of business with private capital/alternative asset managers, that's our capital solutions practice in the private credit and other fundraising vectors in our restructuring and liability management practice in our PCA, our funding business, which had a lot of activity, especially in the secondaries component of its business last year and that continues into this year. And then to the heart of your question, we are just seeing, I think after a period of time in which private equity was trying to -- was a little bit on the sidelines regard to especially sell side, their core business model is being transactional coming back online.

I don't -- so I think it's just -- it was a matter of time. And we're seeing that in our [indiscernible], I think it's also current from the commentary from some of the leaders of the biggest alternative asset managers that they're coming back. I think they said coming back on the playing field, and that's the way I would describe it. So the low of activity is not what it was yet in 2021. It's clear also that our dialogue with strategic started to get more serious earlier than with private equity, but that is now recalibrating and we're seeing a lot of dialogue with private equity around M&A specifically in addition to the other within which we interact with them.

[Operator]

Thank you. I will now turn the call back to Peter Orszag for any closing remarks.

[Peter Orszag, executive]

Look, thank you for joining. I would just say one thing in closing, which is it's been about 4 months since taking over the role of CEO, and I've been very actively meeting with our clients and our own employees and colleagues and shareholders. And the results of all of that is that my conviction about the path that we're on has only increased is remarkable to interact with clients who are on an unsolicited basis, very complementary of the work that we do. And most importantly, this organization is united in its ambition to aim higher and achieve our Lazard 2030 goals. So more to come, and thank you joining us.

[Operator]

This does conclude today's Lazard's Fourth Quarter and Full Year 2023 Earnings Conference Call. You may disconnect your line at this time, and have a wonderful day.