Moelis & Co

NYSE:MC

Earnings Call Transcript 2017-Q4

[Operator]

Good day and welcome to the Moelis & Company Fourth Quarter 2017 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Ms. Michele Miyakawa, Head of Investor Relations. Please go ahead.

[Michele Miyakawa, Head, IR]

Great. Thank you and good afternoon everyone. Thank you for joining us for Moelis & Company's fourth quarter and full year 2017 financial results conference call. On the phone today are Ken Moelis, Chairman and CEO; and Joe Simon, Chief Financial Officer.

Before we begin, I'd like to note that the remarks made on this call may contain certain forward-looking statements, including regarding future performance, 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 or non-GAAP 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 Ken.

[Kenneth Moelis, Chairman and CEO]

Thanks Michele and good afternoon everyone. 2017 was an important year for our business and we ended the year in a position of strength. We delivered record full year revenues, which were up 12%, and we made significant investments in our global platform, expanding our expertise across key products, regions, and sectors.

We grew banker headcount by 15%, including 16 new Managing Directors and in January, we internally promoted five of our advisory professionals to Managing Director.

During the year, we were involved in some of the largest and most complex transactions globally, and we were ranked number one at Global Restructuring Adviser based on announced volume.

Our strong and consistent performance is a testament to our differentiated model, which is defined by, first, our team approach and our culture with a single P&L and one global bonus pool, which leads to our bankers coming together to provide better client advice and also to develop our internal talent.

Second, our focus on organic growth versus acquisitions, which results in an industry-leading return on capital with no earn-outs, no debt, and no goodwill on our balance sheet. And third, we've built a franchise based on trust, confidentiality, and expertise that is laser-focused on our clients.

Today, I'm pleased to announce that our board has approved $1.50 special dividend in addition to a 27% increase in our quarterly dividend to $0.47 per share. This is our fifth special dividend to-date and the fifth increase in our regular dividend. Including today's announcement, we will have returned over 40% of our IPO price or $10.14 per share.

I would like to turn the call over to Joe, who'll take you through our results, and then I'll discuss the market environment and our growth opportunities going forward. Joe?

[Joseph Simon, CFO]

Thanks Ken. I'll review our results and I'll also touch on the impact of recent tax reform. We achieved record full year revenues of $685 million, up 12% from the prior year as growth compares with a 1% decline in the number of global completed M&A transactions over $100 million and a 12% decline in volume terms.

Our full year revenue growth was attributable to growth in M&A where we saw a large -- larger number of completions and earned higher average fees. Restructuring activity was up slightly from the prior year and remained an important and steady contributor despite a low default rate environment.

Geographically, U.S. activity remains robust and continues to be our largest revenue contributor and EMEA revenues increased substantially, thanks to strong M&A activity in the region.

For the fourth quarter, we reported $169 million of revenues, which was down 17% from the prior year period. This was largely due to a slowing of restructuring activity from a very active quarter four 2016.

Turning to expenses, our adjusted comp expense ratio of 58% for the quarter and the year is in line with our 2017 target as well as with prior periods. Our non-comp ratio increased to 17.4% for the full year of 2017 from 14.9% in the prior year. The increase in the ratio was primarily attributable to the growth in our business, including increased recruiting fees, new business development and transaction-related charges.

As you may recall, last quarter, we described the accounting impact of Moelis Australia's two tranche AUD110 million capital raise. The tranche placed in October resulted in a non-cash accounting gain of $9.7 million, which was reported in other income and contributed $0.09 to EPS in fourth quarter.

For the year, we recorded a total EPS benefit of $0.40 related to the Australia IPO and as follow-on capital raise. We continue to hold our original position of 50 million shares, which, based on the most recent market close, is worth over $225 million or approximately $3.50 per fully diluted share of MC.

On taxes, our corporate effective tax rate of 33.8% compares with 39.2% in 2016. The 2017 rate includes the positive impact of excess tax benefits related to vesting events, which were largely concentrated in the first half of the year. Excluding the impact of these discrete benefits, our effective tax rate would have been 38.6%.

As a reminder, our adjusted presentation assumes that all partnership units have been converted to shares so that all of the firm's income is taxed as if it were subject to our corporate effective rate.

Going forward, on the same adjusted basis, we expect our corporate effective tax rate to be approximately 26%, assuming a geographical mix similar to 2017 and excluding the tax impact of share price changes related to vested equity.

Including the impact of share price changes and assuming price stays near current levels for our first and second quarter vesting events, the full year corporate effective tax rate would be approximately 18% to 19%. We believe tax reform will also be beneficial to M&A activity, which Ken will address later.

Given the rate reduction, both our deferred tax asset and the liability related to the tax receivable agreement needed to be remeasured. The estimated net GAAP impact of the remeasurement was a charge of approximately $46 million. We excluded the impact of this net charge in our adjusted presentation.

We remain committed to returning our excess capital to shareholders and as Ken discussed, our board declared an increased regular quarterly dividend and $1.50 special. The dividends will be paid on March 7th to stockholders of record as of February 20th. We ended the year with a strong balance sheet and no debt.

And I'll hand the call back to Ken.

[Kenneth Moelis, Chairman and CEO]

Thanks Joe. I'd like to turn to the environment and what excites me most about how we're positioned. First on the M&A environment. The driver behind M&A right now is strategic imperative. Companies are proactively repositioning their business models in a rapidly changing world primarily as a result of disruptive technology.

Today, it is essential that companies own the right set of assets to position themselves for the future and this is causing CEOs and Boards to analyze and look at multiple options, probably more than ever before.

Tax reform will fuel this trend as the after-tax returns on assets are better than ever. We're creating significantly more cash flow to support strategic M&A. Each asset is benefiting from additional cash flow, making the returns better. And as a result, we expect a longer and steadier M&A cycle.

In concluding, we remain highly optimistic about our business and our ability to grow. First, we have a growing and maturing MD base with the best bankers in the world. It has been 10 years, and our brand is now known around the world for excellence, confidentiality and trust. We will continue to grow our ranks by attracting new talent, retaining our top talent and promoting from within.

Since our last earnings call, we've added three Senior Managing Directors in consumer, FinTech and Healthcare in addition to the five Managing Directors we internally promoted in January, bringing our total MD count to 124 as of today. We have a strong hiring pipeline for 2018, and we expect to announce a couple of new Managing Director hires in the coming weeks.

Second, our model is team-oriented, competitive and consistent, and we're well-positioned to take market share in this unique M&A cycle.

And finally, the key to it all is bringing it to the bottom-line. In 2017, we increased our headcount by 15%. We hired eight new Managing Directors, all while keeping our comp ratio flat at 58%, declaring two special dividends totaling $2.50 and increasing our regular quarterly dividend by 27%. We believe our model is differentiated in our ability to grow the company while bringing revenues to the bottom-line and maximizing return to shareholders.

And with that, I'll open it up for questions.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions]

Our first question comes from Ken Worthington with JPMorgan. Please go ahead.

[Ken Worthington, JPMorgan]

Hi. Good afternoon. Thank you for taking my question. Just, Ken, I love to flush out your comments earlier. So, in terms of U.S. tax reform and the impact to activity levels, I love your impressions on the following. So, one, do you think that there's a different impact for larger companies doing larger deals versus smaller companies doing smaller deals as a result to reform?

Two, are there certain sectors that you think are more positively impacted than others? And maybe what is the drivers? Repatriation is better for future M&A and then just lower taxes, but I'd love to hear your comments there.

And then do you think there's any relative impact on U.S. deals? Are they more or less attractive than cross-border deals now, again, as this -- the result of tax reform?

Or -- and then maybe fourth, since you think about this all the time, is there another way to slice it and dice it, which you think you've got great insights on that I just overlooked? Thanks.

[Kenneth Moelis, Chairman and CEO]

Okay. Thanks Ken. So, I think, first of all, M&A, as I said, has been driven by strategic imperatives. I really believe that. And I think what the tax overhaul did was just make every asset more profitable.

Look, if you're a U.S. taxpayer, you're generating about 25% more after-tax cash flow from the same asset that you did the day before. I was thinking -- I looked at Moelis & Company and what it did to our after-tax cash flow, and I said to our group, we would have had to increase our topline revenue by somewhere between $150 million and $200 million just to generate the same after-tax cash flow under the old regime. It's actually a startling number. And so we got that just by did to the government taking 13 points of our costs out.

So, I will say that it is -- they start all these -- all this has been starts with a strategic imperative. I believe that what the Tax Cut did was give people more, call it, animal spirit to go execute on their strategic imperative and it also made the asset they were buying more valuable to them. On an after-tax cash flow, if the asset you were buying was subject to U.S. tax, it is more valuable.

Now, is that larger versus smaller? I think the only thing I'd say is larger companies -- multinational companies had found ways to distribute income around the world and many of their tax rates were in the low 20s.

I do think that the mainstream Middle American businessmen who are here -- and that's the 8 million of them. I mean there's a lot of them. I'm talking about the mom and pops, too. They really got the direct benefit. Some of the multinationals were already managing their tax rates pretty far down.

So, again, I see activity and interest almost across the board on sectors and I think that both large, small and medium-sized companies are all going to be driven to look at their options by the speed with which technology is disrupting them. And the key in this world is to not let your assets become not in the right spot, is to be caught in the right -- with the wrong set of strategic assets.

So, I think -- I just think it's going to go on. I think there'll be activity up and down the asset classes and I don't know that I can segment it from large to small being more impacted.

[Ken Worthington, JPMorgan]

Okay, great. Thank you very much. I appreciate the insight.

[Operator]

Our next question comes from Devin Ryan with JMP Securities. Please go ahead.

[Devin Ryan, JMP Securities]

Thanks. Good afternoon Ken and Joe. Maybe a little bit of follow-up on that. So, obviously, appreciate the commentary on your tax reform and the benefits to the M&A cycle from that.

I mean how should we think about the mix between what's happening in the U.S. versus maybe EMEA, where you've seen some nice growth? It feels like a rising tide is lifting that boat as well maybe for different reasons.

But when you kind of take a step back, how are you thinking about maybe the relative growth in EMEA relative to the U.S. just based on, I guess, different drivers and then kind of where the drivers you're seeing kind of outside the U.S.?

[Kenneth Moelis, Chairman and CEO]

We've had a very good -- strong year in EMEA, and we're very bullish on it. We think that we feel very good about where we are in EMEA, and we want to grow there. And I think it's just the growing confidence level in the European market. Valuations are up and so I feel very good about it. But there's something about the U.S. market that is just extremely -- they move quicker and grow faster. So, I think you could -- you'll have simultaneous growth in both.

As I said, the U.S. market's just an incredibly active deal machine and so I always say never, never underestimate how much activities gets done in the U.S. But also I'd say this, I address just this, we're 10 years old, and our brand outside of the U.S. was pretty underexposed going back five, six years ago -- four -- three, four years ago. And we had to establish that and that's a big, big deal for us right now.

We think that in the world, Moelis & Company is a brand that is welcomed, accepted, and sought after in boardrooms, and it takes a while to do that. It's a difficult -- as I said, you can't advertise your company on the side of a bus. So, you just have to execute, keep your head down, establish a brand of trust and confidentiality. And so I feel very good about the next 10 years for us outside the U.S.

[Devin Ryan, JMP Securities]

Okay, terrific. And follow-up here just with respect to the direct benefit to Moelis from tax reform. I'm assuming no change to the capital management strategy there. But just any quick thoughts?

And then it's great to see the dividend step-up. You've had a number of kind of nice increases over time here in addition to the special and so a nice dividend yield. I'm curious, if the market backdrop shifts and we inevitably hit a soft spot at some time, should we think about the dividend as being able to flex? Or is it now, because it obviously stepped up quite a bit, at a base level that you feel like maybe there could be quarters where you don't get there but you feel pretty comfortable with where it is? I'm just trying to think about if that kind of could slide up and down with the backdrop potentially shifting at some point.

[Kenneth Moelis, Chairman and CEO]

I'm going to turn it over to Joe in a second to talk about the dividend. But we intend to keep -- the regular dividend, we've been very conservative on. That's why we've had so much special. We're not -- if you look at how much special we've had and the fact that we did two this year, you'll realize we're not a risk on the regular and we have no debt. We have not borrowed a cent to pay this. This is all coming right through the income statement.

We don't have any adjustments and we're not differing things and we're not waiting -- this is all -- we expense everything right through the income statement and then give the cash. So, again, I don't want to steal -- Joe, you have -- want to talk about the dividend and how we set it?

[Joseph Simon, CFO]

Well, I think you've said it all. It's -- Devin, I think you should consider it a sustainable level. That's how we think about the regular. We look at the earnings power of the firm has been enhanced obviously by the tax rate change and we increased the regular to reflect the level necessary to distribute the increased excess. And we've done it in a way that we believe is long-term sustainable.

[Devin Ryan, JMP Securities]

Yes. Okay, terrific. And then last one for you, Joe. Appreciate the commentary on the forward tax rate guide. When we think about just the 18% for 2018 since you do have some visibility or better visibility into that, I mean, just from a quarter-to-quarter perspective, it would be helpful just given that it's a pretty big step down. You're getting a pretty big benefit from stock-based comp. So, should we assume -- or if you can give us any color on kind of how to think about maybe 1Q, 2Q given that's where you--

[Joseph Simon, CFO]

Yes. So, I mean, it's hard to -- because we don't think about each quarter from a projection standpoint. We just don't think about revenues on a quarterly basis, so it's hard to give you a precise number.

But the excess tax benefits are treated as a discrete event, so the full year 2018 would need to be calibrated by quarter. Our vesting events are first half loaded, so you'd obviously be seeing a lower tax rate in the first half and a higher tax rate in the second half, all averaging out to the 18% that we're guiding to, 18% to 19% of course.

[Devin Ryan, JMP Securities]

Okay. Thanks very much.

[Kenneth Moelis, Chairman and CEO]

Sure.

[Operator]

Our next question comes from [Indiscernible]. Please go ahead.

[Unidentified Analyst]

Hi. Thanks for taking my question and good afternoon. My question is on restructuring. So, I was hoping you could give us a sense for what restructuring contributed this past year.

I know in the past, you said maybe it's something in the 20% range and you talked about seeing a little bit of restructuring revenue growth. So, I'm just kind of trying to place it within the context of how we should think about that impact to revenues going forward as we move into 2018.

[Kenneth Moelis, Chairman and CEO]

I think it was right about that number. I mean we don't break it out. And we holistically go after these things that we don't have a restructuring division, so -- but 20% is about what we think it runs at. It's about what we think it will run at pending a -- pending any kind of a financial crisis happening. But it's kind of steady there and pretty dependable.

[Unidentified Analyst]

Okay. Great.

[Joseph Simon, CFO]

I think it's really important that you not consider it as a standalone business. I think the power of our platform is the interplay each of the product disciplines have on the other and how that turns out to serve our clients best. So, we don't think about it in that kind of stratified way that you're trying to model it perhaps.

[Kenneth Moelis, Chairman and CEO]

Yes, understood. No, I mean, I understand they're -- it's part of a holistic business, but just trying to think about revenue impacts on a quarterly basis. But second question for you is around recruitment. I'm sure the landscape for recruiting is highly competitive and you're happy to take on any strong bankers that work out.

But outside of EMEA, you just talked about growing there. Are there any other sector focuses or specific geographic focuses that you're really thinking about over the next year, year and a half?

[Kenneth Moelis, Chairman and CEO]

I do think we'd like to -- specifically, we would like to hire more in EMEA. But we expanded by 15% headcount last year and we are flat out. We are flat out busy. We think the model and the way we deliver the product is extremely effective. And no matter it seems we grow the company pretty -- we've grown pretty strongly over the years and we've never been able to not be flat out.

So, we think that we could add people in every category. We think the model we have delivers a product that the clients really like. And so I think -- I'd turn the question around the other way. If we found a good fit, both culturally and expertise-wise, it's almost every sector we'd hired into.

[Unidentified Analyst]

Okay. Appreciate the color. Thank you.

[Operator]

The next question is from Michael Needham with Bank of America Merrill Lynch. Please go ahead.

[Michael Needham, Bank of America Merrill Lynch]

Hey, good afternoon everyone. So, first, I think I just have a couple of expense questions for Joe, one on non-comp. There are a number of one-time items in 2017. I was hoping you could kind of give us like a good base level of non-comp to grow from and then to the extent that you have anything planned in 2018 in terms of like higher non-comp expense, if you could share that. And then for comp, assuming a similar transaction environment to that 58%, is that a good ratio to use?

[Joseph Simon, CFO]

Sure. So, I think starting with non-comp. I think the -- given our headcount growth in 2017 as well as the expectation in 2018 that I would suggest that the expectation be around $30 million to $31 million a quarter. I think that's probably a good way to think about it on a steady-state basis.

With respect to the comp ratio, I think at this point, our -- we believe all our cost ratio targets remain appropriate and comp is part of that.

[Michael Needham, Bank of America Merrill Lynch]

Okay. Thank you. And then kind of another take on hiring. It kind of -- it seems like we're hearing that headcount expansion is a common theme for 2018 for most of the firms in the sector.

Just wondering if -- are you seeing firms get more aggressive for talent in environment where everyone's going to be paying less in taxes, the deal environment looks pretty good. Just wondering if there's pressure there on the talent pool for the types of people that you're interested in and any pressure on comp or anything like that? Thanks.

[Kenneth Moelis, Chairman and CEO]

We're committed to 58% ratio. And we've been disciplined on it, and we intend to stay disciplined on it. Sure, you're seeing slightly -- people -- our pay was up. Our median pay is up. The Street is up.

Look, if you look -- one thing about our business, if you look at it about a year ago with the S&P 500 was up like 35%, I don't know. I've lost track in the last few days, 40%. But if that was sort of median and if you could say the average company was 40% larger, you'd see what happens to our business. M&A is a percentage of transaction size.

So, the exact same company is entering a transaction if they're 40% larger. Your fee doesn't go up by 40%, but it does go up by an amount, call it, 25%. Same deal, same company, same everything. So, when you have a general rising market, the individual that has relationships with those underlying companies is 25% more valuable. I hate to say it or some amount like that. I'm using rough numbers.

So, we're seeing a little of that, but we're also seeing a continuation of top talent want to leave big banks. And by the way, the other one we're seeing now is, look, we've been in the new world of boutique, and five years ago, everybody was asking me about kiosks. What we're seeing some of the spread of sub-scale boutiques where people are looking to actually get back into what might be the surviving few large boutiques, and I think we're going to continue to see that.

I think you'll see -- and I'll be very careful to say this, a consolidation, but I don't mean financial. No intention of consolidating financially, but a consolidation of the talent into global platforms that can deliver holistic global advice. And I do think there's a lot of fragmentation that will decide they want to be on a more stable platform.

[Michael Needham, Bank of America Merrill Lynch]

Make sense. Okay. Thanks.

[Operator]

Your next question is from Jim Mitchell with Buckingham Research. Please go ahead.

[Jim Mitchell, Buckingham Research]

Hey, good afternoon. It sounds to me that even despite some pretty significant headcount increases this year, I would assume you're sort of implying that maybe you can do similar growth in headcount. You can stick to a 58% comp ratio. So, it kind of implies pretax margins can stay pretty similar to where they are, yet after-tax obviously going up with the Tax Cuts.

So, should we assume that that cash flow, if that's right and I'm thinking about that correctly, all that cash flow should or could go into the dividend or at least the special? And is that part of your thinking why the quarterly dividend went up as much as it did? Was it in anticipation of this?

[Kenneth Moelis, Chairman and CEO]

It was partly in anticipation of having more after-tax cash flow, yes. And the answer to what you said is something that I try to drive home every time on the calls, which is that we've been now public for a little over three and a half years. I think we've expanded our headcount from about, I don't know, maybe it's up at least 50%, 60%.

But all that goes right through our income statement. It's in our 58%. We're not putting it on our balance sheet or finding ways to not to expense it. It's in the numbers, which allows us to generate that cash. Its real cash that we can then give out to you and our shareholders.

And so the answer to that -- the short answer is yes. We increased headcount by 15%. We fully allocated that to our income statement, and we're still able to generate after-tax cash flow that allowed us to pay two specials and increase our dividend by 27%. And the short answer, yes. So, it would be fair to say we could not have done the entire dividend increase or would not have under the old tax regime.

[Jim Mitchell, Buckingham Research]

Okay. That's helpful. And then, I mean, obviously, you're pretty upbeat on the outlook, and I think that makes sense. But how do we think about Moelis specifically? Do you feel that the pace of your pipeline, your activity levels are accelerating versus where we've been or still pretty similar? How do we think about how you are looking at the next 12 months for Moelis specifically -- relatively?

[Kenneth Moelis, Chairman and CEO]

We're very upbeat. We think the system works and it -- when you put really good people on a team and then the team shows up and puts all its efforts around the client, it's just -- it works. And I will say this, as our -- again, we're competing with some brands that have a -- only 150-year, 100-year head start on us and establishing it. We're also maturing that way.

So, there are special committee assignments in places around the world where people put together a list of who they should talk to. I'm not sure six or seven years ago, we were on a majority of those lists. I think we're on more and more and those are very valuable as your brand gets accepted because that formation of that committee or whatever the assignment is maybe being done without your knowledge, without ever -- they're just looking for an independent to do quality work on a transaction that might be happening.

So, again, all that feels very good. We continue to be flat out. And so I feel outside of the volatility in the market, I'm very optimistic.

[Jim Mitchell, Buckingham Research]

Okay. Fair enough. And then maybe one question for you, Joe, on the reimbursable expenses impact. Is that material something we should -- you have any thoughts on that?

[Joseph Simon, CFO]

Yes. I mean, I -- obviously, the accounting changes, so now it's going to be grossed up. In the past, it was netted against expense. So, the $30 million, $31 million that I was quoting is under the old method. We have incurred typically $3.5 million to $4 million in 2017 each quarter in reimbursable expenses. So, you gross up revenues and expenses by that same amount.

[Jim Mitchell, Buckingham Research]

Okay. Thank you.

[Joseph Simon, CFO]

Sure.

[Operator]

Your next question is from Conor Fitzgerald with Goldman Sachs. Please go ahead.

[Conor Fitzgerald, Goldman Sachs Group]

Good afternoon. Ken, just wanted to dig into your comments on companies doing M&A as more of a strategic imperative just given all the disruption that we're seeing. Can you think back to another time in history where we've seen a similar phenomenon?

[Kenneth Moelis, Chairman and CEO]

No, I really can't. I actually believe that I've gone through this. I won't bore everybody. But prior, M&A cycles were driven by different reasons, revenue growth or just cheapness. When I got in the market in the 1980s, it was just things were cheap. Everybody bought things at six times EBITDA, and they sold them at eight. I mean, that was kind of what M&A was all about.

Today, M&A is making sure your company is positioned for the future and the future is changing rapidly. And you don't have time to build all the things you might need to compete effectively and all the scale you might need or et cetera. So, no, I don't think I've seen anything quite like this. I mean, it's been this way for a year or two, but I feel like it's accelerating, not decreasing.

[Conor Fitzgerald, Goldman Sachs Group]

That's interesting. Thanks. And then just on the compensation ratio, I mean, just maybe just thinking through maybe not over the next year or two, but looking out maybe four or five years. I hear your comment that you feel good about the 58%, but it does seem like the return on your marginal hire for you and the entire industry has gotten better because of tax reform.

So, you -- I guess, is your expectation that the industry can still maintain 100% of that benefit to shareholders versus having to pass some of that on to the employees just because the returns on the revenue they're bringing in are higher post tax reform.

[Kenneth Moelis, Chairman and CEO]

Well, I'll tell you what, we encourage our employees to be owners and that's their best way to participate in a lower tax rate. And I -- look, I can't predict everything. In a really competitive world, things can change. But right, now it's a fair split. I think Joe Simon said it to me when we discussed what would happen with the tax rate. We just think it's a factor outside the control of the employee base. We think we're motivating people and we have a fair split on how things go.

You're right, if the whole industry decides to compete on a different parameter, anything's possible. For right now, we think we are incentivizing a great group of bankers to do quality work, investing in the things they need.

So, our goal is to invest in a global platform and the best technology, in systems, procedures that allow them to win. So, I think as long as we fulfill our part of that bargain -- and stability. We've maintained a debt-free overcapitalized balance sheet, so people are comfortable with the platform and where they work and they're attracted to that. So -- look, I think as long as we keep up our end of the bargain, I feel pretty good about it.

[Conor Fitzgerald, Goldman Sachs Group]

That's helpful and I appreciate your thoughts. Maybe just one last one for me. I know valuation has been in clutch the last couple of days. But are you hearing any hesitation from corporates or firms that you work with being M&A transactions just given what valuations are?

[Kenneth Moelis, Chairman and CEO]

Very little. Look, nobody liked 1,000-point moves in a day, but nobody's setting up their asset base for the next 10 years based on Monday and Tuesday's trading. So, I really didn't see anybody get -- people were interested. It was a topic of conversation.

But again, the future of your shareholders and your company is really involved with the strategic imperative of you having the right set of assets to compete with your -- with competitors who are very actively looking to get into those assets as well.

And price is an issue. Price has to be dealt with. But being a winner and a leader in your industry is worth many, many multiples more than being put into the second tier in your industry, and I think that's what's driving things. So, the short answer is it was interesting. It was divertive a little bit of people's attention, but it didn't change anybody's view of what they needed to do.

[Conor Fitzgerald, Goldman Sachs Group]

Got it. Thanks for taking my questions.

[Operator]

Our next question is from Betsy Graseck with Morgan Stanley. Please go ahead.

[Betsy Graseck, Morgan Stanley]

Hi, thanks. Good evening.

[Kenneth Moelis, Chairman and CEO]

Hi Betsy.

[Betsy Graseck, Morgan Stanley]

Hey Ken, one thing we haven't talked about yet is interest deductibility and I know it's only impacting a certain set of highly levered companies. But maybe you could give us some sense as to how you're thinking about how that either impacts leverage in M&A or restructuring or could we see any M&A coming out of this interest deductibility carve-out on EBITDA?

[Kenneth Moelis, Chairman and CEO]

So, first of all, let me say this. That's a great question because I forgot -- so look, I think that it was a wonderful -- the whole interest deductibility and limit on leverage. If you think about what -- and the tax law. What all of that went to do is make leverage less valuable.

So, from the -- for the 35 years I've been in the business, an excess amount of leverage valued against the incremental risk, well, there was a 40% tax shield and that was deemed to be worth a certain amount of risk to take on just to be able to divert taxes. Well, that shield is down to mid-20 -- low 20s, which means that aggressive capital is less valuable.

And that's a long way of saying one of the reasons all the investment banks merged in the late 1990s and early 2000s with commercial banks is aggressive leverage was so valuable, all the investment banks decided they had to merge into one of the big capital providers. I mean that was a driving force between a wipeout of an entire independent industry. People think taxes on the margins don't matter. Well, I think that tax shield and the search for that incremental leverage led everybody -- was one of the primary reasons.

So, now all of a sudden, I think money and leverage is going to be much more commoditized. It's not worth as much. Nobody is really going to try to get leverage six or seven times. It's not valuable, which makes all of the big balance sheets much more commoditized, which means your relationship can be with the advisory you want because you're not going to really try to access this very aggressive money.

So, A, I think it's really positive for the [independents to demonize] aggressive capital as a reason to use a bank. And there are several banks that I think will be in -- hurt by that.

Secondly, I don't know -- I don't think it'll affect much. I think that most people don't love leverage. They would rather do deals that are more equitized, but they always had this inefficiency in the tax law that pushed them toward leverage. So, I think you're going to see even the financial sponsors do more growth-oriented deals. They'll be able to get their return by over equitizing now a little easier. And I just think it'll change capitalizations. I don't think it'll change M&A.

[Betsy Graseck, Morgan Stanley]

Does it change pricing for deals?

[Kenneth Moelis, Chairman and CEO]

Maybe not because your after-tax return from putting more equity is 20% higher and you don't have to take on as much risk. Look, I'm not a -- I don't have the Newtonian equation on risk times leverage. But I think they found -- I found putting a little more equity and not taking on a marginal incremental risk in order to get more long-term high growth returns and not having to pay as much taxes, my gut feel is that they made -- that it's a good choice, that over equitizing, making your returns without the risk is a better way to make money for everybody -- for all investors that the market was the beneficiary. And then the valuations -- therefore valuations are going to be higher, not lower.

[Betsy Graseck, Morgan Stanley]

Got it. Less risk, higher multiple.

[Kenneth Moelis, Chairman and CEO]

Yes, I think so.

[Betsy Graseck, Morgan Stanley]

What about the companies that, for lack of a better word, have found themselves in this position where their debt to EBITDA is above the threshold for allowing indestructibility? Are that many companies in that situation out there? Is there opportunity for restructuring for you given that change?

[Kenneth Moelis, Chairman and CEO]

It's funny, I've not heard one, like, call go out saying, hey, we're in that position. First of all, you can roll the deductibility forward. It's not lost forever. You have a -- there's a period of grace, so you can get to the -- you can get there.

I really -- there's not been one call that I know of, and I don't know every call by the way, but not that I know of where somebody said, hey, I'm over the EBITDA ratio. Come help me. And that's not to say it won't happen, but I haven't heard one.

[Betsy Graseck, Morgan Stanley]

All right. And then just lastly, wondering if the tax changes, obviously, ramping discussions in the fourth quarter, got done in December, did that have any impact on completions in 4Q? Should we expect that some of the pending, some of it looks pretty high right now, was pushed from 4Q to 1Q?

[Kenneth Moelis, Chairman and CEO]

Look, for some reason, there was -- and somebody put out a research report, one of -- I think one of the people on the phone, I should know who, so I could give him credit, but about how long it took.

There was an extension of the regulatory timeframe just across the market. I don't know what did it, but it happened. And again, I ask everybody not to look us on a quarterly basis, but it did extend out. And we were kind of surprised at some things that maybe extended longer than they did. And then I looked up and I said, well, I guess, that's good. They're in a lower tax environment. I'd love to tell you that I magically caused that to happen, but I didn't. It just happened.

[Betsy Graseck, Morgan Stanley]

Okay. But there was some push forward of deals.

[Kenneth Moelis, Chairman and CEO]

If you looked at it, there were some happening in the regulatory world and there was a longer extension from announcement to closing. I think it was pretty -- I think it was across the Board and it's hard -- I don't have a real good explanation other than to say it happened.

[Betsy Graseck, Morgan Stanley]

Okay. Thanks a lot Ken.

[Kenneth Moelis, Chairman and CEO]

Thank you.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Ken Moelis for any closing remarks.

[Kenneth Moelis, Chairman and CEO]

I just want to thank everybody for your support and everybody's interest. And let's hope 2018 is as good as we think it'll be. So, thank you. Bye, bye.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.