Moelis & Co

NYSE:MC

Earnings Call Analysis

Moelis & Company Q3 Revenue Up 19%, Comp Ratio Elevated

In Q3 2023, Moelis & Company's adjusted revenue climbed 19% to $278 million, bolstered by its restructuring business, but they don't anticipate this trend to continue into the next quarter. Even with a year-to-date decrease of 16% in revenues mainly due to fewer M&A completions, the third quarter saw an increase compared to previous ones with record-level pipelines across its three product areas. The firm's investment in talent during the downturn led to an elevated full-year compensation ratio accrued at 83%. Non-compensation expenses are predicted to remain high through Q1 2024, settling at about $42 million quarterly after the termination of a fee-sharing agreement with SVB.

Restructuring Business Resilience Amid Economic Tumult

The earnings call opened with an acknowledgment of the firm's strong restructuring quarter, a silver lining in a challenging macroeconomic environment. Management expressed confidence in the restructuring business's medium-term trajectory, stating a healthy backlog and breadth of out-of-court expertise. This optimism reflects the firm's ability to pivot amidst economic uncertainty, positioning itself as a trusted advisor in times of corporate distress.

A Forward-Looking Strategy Through Aggressive Hiring

Despite acknowledging year-to-date losses, the company has vigorously pursued an expansion strategy. By securing top-tier technology and healthcare talent, including recruits from events like the Silicon Valley Bank and Credit Suisse situations, management exhibits a long-term vision focused on growth areas. This investment in expertise, particularly in sectors like technology and energy transition, is seen as an effort to establish a robust foothold for an anticipated M&A cycle.

Fiscal Discipline and Liquidity Management

The financial stewardship of the firm came to light when discussing cash balance concerns and compensation accruals. The management reassured stakeholders, emphasizing no need to draw on credit facilities for dividends and year-end bonuses. Moreover, with $300 million in cash and additional levers available, the firm expects to maintain healthy liquidity levels post bonus distributions, solidifying its financial robustness.

Optimism Sprouts from a Two-Year Transaction Backlog

Management revealed a substantial backlog of transactions delayed due to the economic climate. With expectations of the Federal Reserve signaling the end of the rate hike cycle, the firm foresees a flurry of deal activity as sponsors face pressure to distribute returns to limited partners. They highlighted the growing pool of private credit and the financing environment's potential recovery, indicating a possible rejuvenation of transactions going forward.

Building for a Changing Investment Banking Landscape

A significant takeaway from the call was the firm's long-term strategic outlook. Despite recent economic volatility affecting deal timelines and financing conditions, there's optimism for a structural shift in the industry. Management anticipates regulatory changes to discourage large banks from mixing state-guaranteed deposits with speculative ventures, creating a gap that independent banks like theirs are well-positioned to fill. This expected divergence presents a tailwind they are eager to capitalize on, leveraging their strengthened advisory capacity.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. My name is Sheryl, and I will be your conference operator today. At this time, I would like to welcome to the Moelis & Company Earnings Conference Call for the Third Quarter of 2023. [Operator Instructions]Thank you. I would now like to turn the call over to Mr. Matt Tsukroff. Please go ahead.

[Matthew Tsukroff, executive]

Good afternoon, and thank you for joining us for Moelis & Company's third quarter 2023 financial results conference call. On the phone today are Ken Moelis, Chairman and CEO; and Joe Simon, Chief Financial Officer.Before we begin, I would like to note that the remarks made on this call may contain certain forward-looking statements, which are subject to various risks and uncertainties, including those identified from time to time in the Risk Factors section of Moelis & Company's filings with the SEC. Actual results could differ materially from those currently anticipated. The firm undertakes no obligation to update any forward-looking statements.Our comments today include references to certain adjusted financial measures. We believe these measures, when presented together with comparable GAAP measures, are useful to investors to compare our results across several periods and to better understand our operating results. The reconciliation of these adjusted financial measures with the relevant GAAP financial information, and other information required by Reg G is provided in the firm's earnings release, which can be found on our Investor Relations website at investors.moelis.com.I'll now turn the call over to Joe.

[Joseph Simon, executive]

Thanks, Matt. Good afternoon, everyone. On today's call, I'll go through our financial results, and then Ken will comment further on the business. We reported $278 million of adjusted revenues in the third quarter, an increase of 19% versus the prior year. The revenue increase was driven by our restructuring business and some particularly large restructuring key events. We do not expect this to recur next quarter. Our year-to-date adjusted revenues were $645 million, representing a decrease of 16% from the prior year period. The decline in revenues is primarily attributable to a decrease in M&A transaction completions.Moving to expenses, our year-to-date compensation expense was accrued at 83%, which is our best estimate of a full year ratio. Our elevated compensation ratio is a function of a revenue dislocation, driven by the still challenging M&A environment and our decision to aggressively invest in talent during this downturn. Our third quarter adjusted non-comp expenses were $50 million, which includes approximately $8 million of co-advisor and legal fee expense related to completed transactions, which includes our transitional SVB fee sharing agreement related to certain pre-selected mandates. Our non-compensation expenses are expected to remain elevated through the first quarter of 2024 when our SVB fee sharing agreement terminates. However, the underlying quarterly run rate continued to be approximately $42 million.Based on our updated full year projection of income, we accrued tax expense to equal an effective rate of 1.7%. Our non-deductible expenses are large relative to our pre-tax book income. Over the longer term, we expect to reflect the tax rate more consistent with our recent history once normalized productivity can be restored.Regarding capital allocation, the Board declared a regular quarterly dividend of $0.60 per share, consistent with the prior period.And lastly, we continue to maintain a strong balance sheet with $297.8 million of cash and no debt.And I'll now turn the call over to Ken.

[Kenneth Moelis, executive]

Thanks, Joe, and good afternoon, everyone. The third quarter marked a significant increase in revenues versus prior quarters. In addition, the pipelines for each of our 3 product areas continue to grow, and the total pipeline is near record levels. However, M&A completions continue to be challenging, and although our restructuring capital markets business have been quite actively outsized restructuring contribution is unlikely to repeat in the fourth quarter.Liability management continues to be the main driver of restructuring activity. The team has been a leader in out of court engagements having advised companies on 5 of the 10 largest out of court restructuring transactions since 2020. If the Fed maintains rates at current levels, out of court restructurings will continue to be a significant opportunity for us. In order to help our clients, not only grow, but also help them address liquidity and maturity issues, expanding our capital markets business has been a strategic priority for the firm. The team has grown in size and capability and we're advising clients on a broad range of capital markets transactions.We have significantly enhanced the firm's ability to address the largest sector fee pools. Over the last 12 months, we've hired 27 Managing Directors, while still managing overall headcount through targeted attrition. Although it is difficult to predict when the M&A business will recover, what we do know is that, the cycle will turn, and when it does, we are well positioned to capitalize on it for years to come. The investments we're making today have dramatically improved the firm's earnings power.And with that, I'll open it up for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Devin Ryan with JMP Securities.

[Devin Ryan, analyst]

I guess, first question, just want to start on kind of compensation construct. So, I guess, first off, Joe, you may have said it. But in terms of just the full year, you're running at 83%. Is that the right way to think about the fourth quarter? Or is 87%, I guess, the right way? And then, I guess, the bigger question is, just trying to think about this year and appreciating this year as far from normal, if we look at the 83% year-to-date and compare that to where I think you guys have historically said, comp ratio closer to 60% is quite more normal. The delta is like $150 million in compensation. So, I guess, the question is like, is virtually all of that just tied to this kind of elevated recruiting? Or how much is kind of competitive dynamics? Because, I guess, everybody is just trying think about like where we revert back to any more normal environment? And how much inflation, if you will and compensation is just in the system? And I think that's a question every firm is getting asked right now.

[Joseph Simon, executive]

Yes, so I'll answer the first part of your question, which has to do with the ratio, that 83% is the target for the full year, the 87% for the quarter was basically the catch up for the first 2 quarters that were accrued for at 80%.

[Kenneth Moelis, executive]

And addressing your issue, look, there are 2 events going on and they're intermingled. One is, downturn in revenues due to a pretty difficult M&A environment. And yes, that would cause a significant elevation in the comp ratio no matter what. But then 2 things happened this year, we decided, and again, I've done this -- I've been doing this for many years, there are 4 times in the last 40 years where I thought you could take advantage of significant disruption, lengthy, difficult disruption in the banker market. The first was when we -- the last was when we founded the company in the great financial crisis, of '10, where we really created the company. I look back, I went to Drexel -- DLJ from Drexel Burnham in 1990. And they created a firm in the midst of a disaster in the junk bond market, they created a firm that ultimately was extremely valuable over that franchise. And even UBS did that after the tech downturn in 2001. This felt like that opportunity, a huge disruption in talent, people's desire to stay where they were. And we took advantage of it. We hired 27 people in a year. It's almost -- it's more than 20% of the existing Managing Director base.And by the way, Devin, while we did that, you'll see that the headcount is only up 3% to 4% at the end of the year. So, we actively managed a very significant amount of people out. We don't schedule any of that. We run it right through our income statements. So some of that other people might have put as a charge for terminations or one-timers. We're kind of running it all through the income statement. I don't know the exact breakdown of what it would be. But I think the earnings power of the firm has significantly expanded. And that in a through the cycle normal business that we'll be back to our normal comp ratio. I'd say this, there's probably -- and we'll see what happens over the next year, there's probably 1%, maybe 2% of comp ratio that is going to the junior bet, the junior non-MDs that will not be recoverable just because we've raised comps throughout the non-managing directors on the street, and I suspect that might be sticky.

[Devin Ryan, analyst]

Got it. Okay. Terrific color. Just a quick follow-up on just the M&A market more broadly and just want to get a little more texture around how you guys are feeling, maybe today relative to 3 months ago. On one hand, I think October was a better month than we've seen in some time for announcements and some larger deals within that. But the tone has been a bit better. At the same time, there's still kind of a fair amount of macro uncertainty. So, love to just get a little bit of sense of whether you're seeing kind of maybe more activity, your sponsors engaging more than they were a few months ago and just what the general tone is appreciating that it's still pretty complex and dynamic backdrop?

[Kenneth Moelis, executive]

Yes, so you're going to ask me how I felt today versus 2 days ago? Let me say, our backlog -- our pipelines are extremely strong. And let me -- about a year ago, I think we talked about having a decent pipeline, but I described it as fragile. And I think I felt it was fragile because it was a pipeline gathered during a better interest rate environment that was then facing a bad financing market. And so, that you just knew you were fragile, whether it involved SPACs or all the kinds of things that were going to be eliminated. At this point, I feel like the pipeline is actually very strong. There is an enormous amount of deal backlog that wants to hit the market.And I've been saying my new analogy for the market is, I've stopped, I don't like the green shoots analogy, because I said the Fed has a big weed killer. And so, I don't know how you manage your green shoots when somebody could just destroy your crop at any moment. But especially as of yesterday, I feel like this market is more -- and you'll forgive me, I fell in love with Drive to Survive during COVID. I'm not a real Formula One fan. But it feels more like that market where as of yesterday, my favorite part of the show is when the red lights go down. There 5 red lights if you haven't watched it, and then the race starts. But the noise and the amount of energy that's pent up as the lights click is always very exciting. The cars are on the track, the engines are revving, everybody is waiting to go but you can't move till the fifth light goes down. And it feels to me that yesterday that was the fourth light clicking off, meaning that the Fed felt like they're getting to the end, there was a real signal yesterday that we are extremely close to the end. And I do think the pipeline will take off as soon as that last red light goes off, and it'll be quick, and it'll be fast, and there will be a lot of activity.

[Operator]

Your next question comes from the line of Ken Worthington with JP Morgan.

[Kenneth Worthington, analyst]

You're losing money year-to-date, do you expect to lose money for the year, unless there's a meaningful improvement in deal activity? And does this matter?

[Kenneth Moelis, executive]

I think we'll probably lose money because even if the deal activity starts tomorrow, you're not going to see the closings till the first quarter or the second quarter. We have what we have, plus or minus a very little bit from here to the year-end. And does it matter? Sure, it matters. I mean, I'm not -- but what we decided to do was recreate a firm that faces, I mean, a half of the 27 Managing Directors were in the technology hire at a Silicon Valley Bank. It's a fee pool that will be extremely large and relevant for years to come. And look, we didn't -- we don't get to capitalize it. We might have bought talent that equals 20% of our firm. And there's no capitalization of that cost and runs right through our income statement. We exited -- as you can tell, exited a significant amount of people to keep our headcount within a 3% or 4% range while we did this. And it goes -- it's an investment that by accounting reasons in our business goes through your comp ratio and your earnings.Does it matter? Sure. Was it extremely difficult decision for us to take this -- the decisions to do this? Yes, you can imagine there was the debate on this is significant. Do I think that it will pay back extremely well over time and always has in every past cycle? You can't create these franchises when you want to, you have to create them when you can.

[Kenneth Worthington, analyst]

Okay, fair enough. And then just maybe moving to the balance sheet, we don't have the Q yet. So talk about the cash balance given the dividend and the compensation accrual, do you guys think you'll have to draw down on the revolver? Or is there enough cash to kind of meet the dividend in the year-end bonus payouts?

[Joseph Simon, executive]

Yes, we obviously are pretty attentive to that area. We do not expect to have to draw on the line. We expect to have adequate cash to service the dividend, as well as the compensation at the end of the year.

[Operator]

Your next question comes from James Yaro with Goldman Sachs.

[James Yaro, analyst]

I take your point on the strong restructuring this quarter not repeating. But how is the challenging macro backdrop affecting the medium-term trajectory for restructuring?

[Kenneth Moelis, executive]

We had a really good restructuring quarter. And by the way, we have a really good restructuring business going forward as well. It was outsized, even for us for this quarter. But it's at the top end of its range. Our backlog on restructuring is very good. And I feel very good about it going forward because our out of court expertise is something that most people want. Most of the deals that have been done in the last few years have been capitalized with a significant larger amount of equity than in prior downturns.So, the route to -- for most of these transactions is not straight into bankruptcy. It is to do capital markets to extend runway and liquidity, which we beefed up our capital markets for that and liability management exercises to create room. And I think the fact that most of the transactions have so much equity under the debt capital, gives you the ability to do innovative solutions without going to court. So yes, I think the restructuring business will continue. There are a lot of firms that will continue to have trouble with higher rates, but they do have options and flexibility to address them.

[James Yaro, analyst]

Okay, that's very clear. Maybe we can just turn to your hiring plans. I guess, should we expect you to continue to hire at an elevated pace into next year? I'd imagine it obviously won't be at the level you've been hiring at, especially earlier in this year. But will it remain elevated into next year?

[Kenneth Moelis, executive]

I don't think -- nothing like us. We've gotten -- look, these were a couple of the large sectors we wanted to address technology, again, was over half of the Managing Directors. We established an energy transition team, which is, as a result of the IRA just became a market that we wanted to be in and wanted to be in significantly and found a great team there. The Credit Suisse debacle freed up some exceptional talent in industrials. And we took advantage of that. And prior to that we had been very aggressive in health care going back 12 months ago. So, I think we've done a very good job in the sectors that we really wanted to turn the firm to address coming to the next M&A cycle. There's -- I'm not going to say which one, but there is one more sector that we're kind of looking at. But there will be nothing of the magnitude of this. We think we put in place a significant amount of the talent that we have to address the markets.

[Joseph Simon, executive]

And if the fifth light goes off, you're going to have the opportunity.

[Kenneth Moelis, executive]

Right, it's just -- I have to wait for them to all watch Drive to Survive, or else I can't continue with the analogy. But yes, if -- it feels like we're much closer to the start of the race happening, and at that point, I think it would be tough to find -- it's going to be tough, the talent will get busy. And people will stay in their seats again. So, if that happens, I do think we'd slow down as well.

[Operator]

Your next question comes from the line of Steven with Wolfe Research.

[Brendan O'Brien, analyst]

This is Brendan O'Brien filling in for Steven. I guess, to start just on the M&A outlook commentary, your views on how quickly activity could ramp next year, was maybe a bit more optimistic than what we've heard from some of your peers, which have indicated that this would be more of a stop-start recovery. I want to get a sense as to whether you're saying that we could see a ramp and activity that is similar to what we saw during COVID. And, I guess, circling back to the Drive to Survive reference, what is that fifth light in your view that could kickstart activity?

[Kenneth Moelis, executive]

Well, that's a good question because you're actually right. I think the reason is -- I think yesterday was a big day. I think that -- I took yesterday to be the fourth light to tell you the truth. And I might not have the same outlook had it been -- had this call been 5 days ago. So, I have -- I just happen to have the benefit of going after the Fed yesterday. It felt to me, like they were saying, and I believe that the rates have not fully been reflected in the statistics they're seeing. I do think companies are having much more difficult time, some of the consumption part of the economy has kept GDP up. But I think companies are having enormous problems with the higher rates. And I thought yesterday I read it that we are starting to look at waiting to see if these rates have issues that we haven't been able to measure yet.And so, I just want to acknowledge that I don't think I would have had the exact same commentary that I wouldn't have thought, again, to stretch the analogy that the fourth light had gone off on the race. And I do think so we may be 1 light away from it, where the Fed just confirms that we're at the end of the red cycle. There are several things that can trigger it. Would it be COVID like? Probably not. I mean, COVID was triggered by a drop of interest rates, I forgot from where to where, but almost to 0 interest rates and a flooding of the capital markets with money. But I do think it would ramp up pretty quickly because there are a lot of transactions. Remember, COVID only deferred transactions for 3 or 4 months. I guess, it was from like the beginning of March to maybe it got triggered again, by July and August. There's a 2-year backlog of LPs that want capital of sponsors that need to either buy or sell something, and companies that also want to get into the market strategically. So, I don't -- it doesn't feel like COVID in terms of the drop in cost of money. But maybe the backlog of 2 years will drive a similar transaction volume.

[Brendan O'Brien, analyst]

That's great. And, I guess, my follow-up, restructuring was a big driver of the results this quarter. And I know that Joe indicated that you don't expect this to repeat next quarter. I just wanted to get a sense as to how we should be thinking about, what was typically a seasonally stronger quarter and 4Q and whether that's an indication that we should expect some decline in revenues. And if you could give some context around how large of a contributor restructuring was to this quarter's results, that would be great.

[Kenneth Moelis, executive]

We always say that restructuring capital markets is 20% to 25%. For the year, it's probably at the high end of that, which is 25% or better. And for the quarter, it was almost 50% higher than that. So it was -- but we don't -- again, 1 quarter these revenues fall in is a bad way to look at it they just happen to fall in and out of certain periods. I've looked at it, we're at the high end of the contribution we've had as a firm, probably a little more than 25%. If you include capital markets in that, it's probably close to 1/3 for the year. And capital markets, I included that because it has become an alternative in a lot of these capital raises are finding liquidity for companies that are sort of in a restructuring, or how do I get liquidity mode?On the fourth quarter, I think you just take the run rate of the 9 months. We had -- again, I'm not giving guidance, but I think if you look at the year, it's kind of if you smooth out for the quarters, the run rate for the year seems to be -- I've been -- I think the whole year is going to be...

[Joseph Simon, executive]

I think the idea was that we just didn't want you to extrapolate the third quarter to the fourth that we have an unusual multiple when you guys look at Dealogic, that's probably a bad way to look at it for the fourth.

[Operator]

Your next question comes from the line of Brennan Hawken with UBS.

[Brennan Hawken, analyst]

Ken, thanks for making the holiday gift for you, very clear. It's some sort of Formula One team round -- sponsored by roundup the weed killer type of outfit. So, seriously, though, when you think about -- we all know the environment is challenging, right? And so, like the comp ratio, yes, it's elevated, no kidding, you're doing a lot of hiring. But you've got an aspiration to get the comp ratio back down to that 60% that we got used to. So, what kind of a revenue environment do you need in order to get there, given the additional fixed expenses that you've added?

[Kenneth Moelis, executive]

Look, you can look through from us from the bottom of the cycle to the top of the cycle. The average revenue per MDs kind of been from $8 million to $12 million, somewhere in that, you can even go $7.5 million to $12 million. That's through the cycle. I'm talking about from the bottom to the top. And without people coming in and out. I mean, when you hire 27 Managing Directors who, let's say, average, started in June, you're not going to get a lot of revenue from those people. But they're in the comp pool. We have mid-150s Managing Director pool and I believe a better fee-facing pool than we've ever had. I'm not going to -- you can do the math, but I think any of those numbers that it had fallen to a normal M&A cycle would easily return the firm to a 60% comp ratio. And the key was to make sure we were covering the fee pools that are going to generate that. And that is including technology, health care, industrials, I think those are 3 of the 4 largest by far. And I feel like we've done that, we've repositioned the firm on the move to do it without having to incur M&A type expenses.Now, again, the bad news is, we don't get to capitalize the cost. But I think the investment is way more efficient, and will prove to be a much higher return on invested capital for everybody on the call. By the way, Brennan, I really don't -- I'm not a fan. I just want to make clear, I don't really know much about Formula One. I just watched the show. It's like that Holiday Inn Express thing. So, I think I'm an expert, but I don't know much about Formula One.

[Brennan Hawken, analyst]

Yes, let's not let the truth get in the way of a good story here, Ken, like --. Okay, that's fair. So, when I look back at the last year -- 2021 was a remarkable one, right? Which was -- which where you were at the $12.5 million. But like 2022, typical on a trailing basis, $8 million, $7.5 million in 2020, $6 million in 2019, $7.5 million, $6.7 million. So like, if we use the upper end of the x 2021 range, and we say $7.5 million and multiply it, that's about $1.25 billion. So, are you saying that basically, at that level, you could get back to the 60% comp ratio?

[Kenneth Moelis, executive]

Yes, I think that's -- I would hope we do better than that. I think we've addressed better fee pools. We substantially improve the brand of the firm, and our go-to-market. I think -- but if we did that, I think we'd be at 60% comp ratio. Yes.

[Joseph Simon, executive]

Mind you, though, I think that's true broadly, but there is elevated fixed costs that are going to go into next year as well. So, it might be a couple of points different. But material, you're on the right track, and certainly '25 for sure.

[Brennan Hawken, analyst]

Yes. Got it. And then when we think about the kind of the impact of the additional commitments via this very active recruiting. We just sort of think tactically about the various costs on the cash. I was just doing a little quick math, is it reasonable to think that the commitments from all of this recruiting could effectively double what your cash incentive pool would be -- would have looked like absent this remarkable opportunity?

[Kenneth Moelis, executive]

No. We are pretty disciplined. We want partners. We hire partners. If you're asking, did we guarantee? We -- our comp -- we hold pretty closely to making sure that the people entering our system are getting comp the same way as our existing group. We like to have equity partners, people who want to see the value of the firm go up. So we're pretty disciplined on that.

[Brennan Hawken, analyst]

Okay. But it is right -- it's not like I'm off in thinking that the recruiting would put upward pressure on what the cash incentive pool would look like absent of recruiting, right? There is no commitment...

[Kenneth Moelis, executive]

Yes, whatever the incentive pool would look like we've hired 27 more of them. And yes...

[Joseph Simon, executive]

Why we're at 83?

[Kenneth Moelis, executive]

And that's what -- yes and that is why we're -- that's one of the main reasons we're at 83.

[Brennan Hawken, analyst]

Yes. Okay. And then just last 1 on that point like, given that you're going to have some liquidity drain, as typically happens in the beginning of next year as the incentive gets better. Should we continue -- you had a nice liquidity build here in this quarter. Should we continue to expect liquidity to build in the year-end so that you're in a position to cover those demands?

[Kenneth Moelis, executive]

Yes, well, yes, we've looked at it closely. We have no concerns about -- we have $300 million in cash going into the end of the year. We've looked at it a dozen ways. We stress tested. And we're fine on the dividend, we're fine on the bonus pool. We have multiple levers we could pull and we're -- we think we're in great shape. I mean, the last -- the low point of our liquidity will be the day we pay bonuses, and we think we're in very good shape to do that.

[Operator]

Our final question comes from the line of Ryan Kenny with Morgan Stanley.

[Connell Schmitz, analyst]

This is Connell Schmitz filling in for Ryan Kenny. So, I guess, we just want to go back to the sponsor question. We've heard a lot on the narrative on why sponsors will ultimately go back to transacting and come off the sidelines. But can you just give an update on how sponsors are feeling in this environment? And what like -- what the next catalyst is to see sponsors transact and what kind of pressure they're seeing from LPs at the moment? And just any color you can give, that would be helpful.

[Kenneth Moelis, executive]

So, the answer is, yes, we do think there is a large bit of pressure on distributing proceeds to LPs. If people want to raise a new fund, they're going to have to return some of the old investments. Most investments that were targeted for disposition as of about 20 months ago, have been on hold. And so, those might be 2016 investments, 2017 or 2018 investments, but they're certainly not supposed to be held for 10 years. So, the pressure is out there to do transactions to recognize where the market is, you might have thought you had 5x return on the asset. And it might only be 3x return. And we think people are getting to that point where they're facing the fact that the realization of what they might have to take slightly different pricing and peak pricing. And we see it in the fact and when I talk about our pipeline is that, there is a serious amount of allocated transactions pending a market to go-to-market on and I think that that market is when the Fed says we're done. I don't think we need a rate cut, obviously, that would be extremely helpful. But it's starting to feel like this might have been the last cut or very close to it. And when that happens, I think there will be a lot of transactions that will go to market.The amount of capital, let me say one thing, the amount of capital that is accumulating in the private credit system, and the creation of funding mechanisms around the banks is also reaching a significant proportion. And so, the ability to finance is coming back up with multiple bidders to put forth financing.And the last thing I'll say about my optimism for the next 5 years, and why I'm happy to build into it is, I do think that the large banks are going to continue to face a regulatory challenge of being in the, let's give out below market funding in order to get advice business. And if they are put out of that business, your regulations, and I think the new Basel negotiations and the regulatory environment are pointing to that more and more as a result of what happened with Credit Suisse and Silicon Valley Bank. I think the regulators are again starting to believe that the government guaranteeing deposits of large institutions so that they can speculate in all kinds of businesses, not the right structure for capital markets. And I think it'd be very healthy to have private credit build up that's not levered 10:1 but is levered 1:1, and is not free to use the government-backed deposit base to go compete with fintech companies and independent advisory companies using the government guaranteed money. And that will be very positive for us. And I think that's a long-term structural tailwind that we'll see over the next 10 years that will continue to drive, I believe a wedge between advisory businesses, and the ability for those institutions to use below market lending to generate business, and has to redound to the benefit of the independent investment banks.

[Connell Schmitz, analyst]

That's really helpful color. I guess, on your point on rates in the near term, though, like, can you just speak to like volatility in yields over the past few weeks? Like has that impacted the pipeline and elongated deals more so? And has that affected financing conditions? Any color on that will be helpful.

[Kenneth Moelis, executive]

Deals were slow to get out of the gate. I mean, again, I think there's -- there might have been a signal in the last 24 hours from the Fed that you can move from having a toe in the water to a full leg. But yes, before that, and again, it's only been 24 hours. So, I can't say I've seen anything change in the -- in our go-to-market on these transactions. But yes, things were -- what was happening is, transactions were being assigned. Work was beginning. And the idea was, we want to be ready when the market's ready for us and a substantial amount of transactions have that sort of structure around them. And so, as I see the market get ready to accept those deals, either via the Fed -- by the way, I think the turning of the year will be, most people between about Thanksgiving and Christmas, just try to keep their jobs versus take risk. And then in the beginning of the year, they think about how to create capital. So, I think there could be a lot of momentum around the Fed decision markets turn to the year, New Year, a lot of those things might come. Look, this could all change. There's a lot of macro events out there that could change that. But as of right now, it feels like we're heading to that type of transition in the market.

[Operator]

I will now turn the call back over to Ken for closing remarks.

[Kenneth Moelis, executive]

Thank you. I'll leave you with 1 recommendation. I think Drive to Survive is a fun show. And maybe you'll understand my -- you'll go back and listen to this call and see if you can make out what I was trying to say. But I look forward to talking to you next call after you've all caught up on, there are 3 to 4 seasons. So, good luck. Thank you.

[Operator]

Ladies and gentlemen, that concludes today's call. You may now disconnect. Have a great day.