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Lazard Ltd. (NYSE:LAZ)

Q4 2008 Earnings Call Transcript

February 4, 2009 10:00 am ET

Executives

Judi Mackey – IR

Bruce Wasserstein – Chairman and CEO

Steven Golub – Vice Chairman and Chairman of the Financial Advisory Group

Michael Castellano – CFO

Analysts

Devin Ryan – Sandler O'Neill

Guy Moszkowski – Bank of America

Lauren Smith – KBW

Dan Kurke [ph] – Seacliff Capital

Justin Hughes – Philadelphia Financial

Michael Wong – Morningstar Investments

Operator

Good day, everyone, and welcome to Lazard's full year and fourth quarter 2008 earnings conference call. This call is being recorded. At this time, all participants are in a listen-only mode. Following the remarks, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator instructions) And at this time, I will turn the call over to Judi Mackey, Lazard's Senior Vice President and Director of Global Communications. Please go ahead.

Judi Mackey

Good morning and thank you for joining this conference call to review Lazard's results for the full year and fourth quarter of 2008. Participating on the call today are Lazard's Chairman and Chief Executive Officer, Bruce Wasserstein; Vice Chairman, Steven Golub; and Chief Financial Officer, Mike Castellano. A replay of this call will be available on our website www.lazard.com beginning today after 1 PM Eastern Standard Time.

Today's call may contain forward-looking statements. And these forward-looking statements are based on our current expectations and projections about future events. They are subject to known and unknown risks, uncertainties, and assumptions. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from those expressed or implied by the forward-looking statements. These factors include, but are not limited to, those discussed in Lazard's filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Management cannot guarantee future results, the level of activity, performance or achievements.

Moreover, Lazard assumes no responsibility for the accuracy or completeness of any of these forward-looking statements. Investors should not rely upon forward-looking statements as predictions of future events. Lazard is under no duty to update any of these forward-looking statements after the date on which they are made. Further, investors should keep in mind that Lazard's quarterly revenue and profits can fluctuate materially depending on many factors, including the number and size of completed transactions on which we advise, as well as on seasonal factors.

As such, Lazard management believes that annual results are the most meaningful. Accordingly, Lazard's revenue and profit in any particular quarter may not be indicative of future results. It is for this reason that Lazard hosts conference calls twice per year to review our first half and full year results.

I will now turn the call over to Mr. Wasserstein.

Bruce Wasserstein

Thank you for joining us to discuss Lazard’s 2008 full year and fourth quarter results. Today I will discuss our strategy and our focus on long-term growth. This environment is the time of opportunity for Lazard, although this has been a tumultuous year for investment banking. I am pleased that Lazard performed well relative to the industry due to our differentiated intellectual capital approach.

In addition to our M&A activities, we have an increasingly important restructuring and capital structure advisory practice. The impact of market depreciation reduced assets under management, but our Asset Management business had positive net inflows and offered many superior investment strategies for the year. Our strategy is to take the long view and focus on our client relationships as we have for over 160 years. We will reinforce our areas of strength, invest in areas of growth, develop new products, contain costs, and maintain liquidity in order to take advantage of future opportunities.

We intend to continue to hire key professionals on a selected basis and to redeploy employees into areas where we see potential for growth, restructuring and capital structure advisory, financial institutions and other sectors, and selected areas in asset management. During the past year, new hires include a European-based Vice Chairman of Lazard International specializing in healthcare, UK-based managing directors in financial institutions, a European managing director specializing in mining and metals, and European debt advisory professionals in France, Germany, and the UK. Key hires in the US include senior advisory professionals in restructuring and capital markets advisory, the aerospace and defense sector, and the Lazard middle market business, as well as the return of our global head of power, utilities and infrastructure.

Global economic challenges may persist for sometime. Based on our continuing performance and ability to find opportunity in turbulent markets, I remain confident in the strength of our model. For the long term, our growth drivers will be the resurgence of M&A, the continued need for restructuring and capital raising, and our Asset Management business.

Steve Golub will now discuss our core operating businesses in more detail.

Steven Golub

Thank you, Bruce. And good morning, everyone. As Bruce mentioned, I will elaborate on our core operating business, which includes our Financial Advisory and Asset Management businesses. Net income on a fully exchanged basis was $206 million or $1.72 per share diluted for the full year of 2008. These results excluded the after-tax, LAM equity charge and provisions for losses from counterparty defaults of $0.07 per share diluted relating primarily to the bankruptcy filing of one of our prime brokers, all occurring in the third quarter of 2008. Including such counterparty default provisions, our diluted earnings per share was $1.65. These results compare to net income of $322.7 million or $2.77 per share diluted for the full year of 2007.

Net income on a fully exchanged basis was $61 million or $0.50 per share diluted for the fourth quarter of 2008 compared to $122.6 million for the 2007 fourth quarter or $1.04 per share diluted. Operating revenue for our core operating business was $1.7 billion for the full year of 2008 and $378 million for the fourth quarter of 2008. Financial Advisory operating revenue was $1.02 billion for the full year of 2008 and $252 million for the fourth quarter compared to $1.24 billion and $393 million for the respective 2007 periods.

M&A and Strategic Advisory operating revenue was $815 million for the full year of 2008 compared to $969 million for the full year of 2007, and was $193 million for the fourth quarter compared to $314 million for the fourth quarter of 2007. Lazard has maintained and strengthened its role as the independent advisor for clients on complex transactions, or situations with needs that transcend economic cycles.

We closed significant transactions during the fourth quarter, including InBev’s $62 billion acquisition of Anheuser-Busch, the largest cash deal in history; the Ministry of Finance of the Netherlands in the State of the Netherlands’ 16.8 billion euro acquisition of the Dutch-based banking and insurance businesses of Fortis and Fortis’ share in ABN Amro Holding; Lloyds TSB Bank’s 12.2 billion pound sterling acquisition of HBOS; Mitsubishi UFJ Financial Group’s $9 billion investment in Morgan Stanley; and ENI’s 2.7 billion euro acquisition of Suez’s 57% stake in Distrigas.

Among the pending, announced M&A transactions on which Lazard advised in the fourth quarter, continued to advise, or completed since December 31, ‘08, are the Nuclear Liabilities Fund in British Energy’s 12.5 billion pound sterling recommended sale to EDF; Exelon on its $13.7 billion exchange offer for NRG Energy; the shareholders of Essent on the 9.3 billion euro offer by RWE; Hapag-Lloyd’s 4.45 billion euro sale to a Hamburg-led consortium; Banco Santander’s $1.9 billion acquisition of Sovereign Bancorp; Astellas Pharma’s $1 billion proposal to acquire CV Therapeutics; and Caisse Nationale des Caisses d’Epargne’s planned merger with Banque Fédérale des Banques Populaires.

Restructuring operating revenue was $119 million for the full year of 2008. Restructuring revenue was $47 million for the 2008 fourth quarter compared to $24 million for the third quarter of 2008. Restructuring assignments normally are executed over a six to 18-month period, which will affect the timing of the recognition of restructuring revenues. Given our leadership position in the restructuring business, we have seen a dramatic increase in the level of restructuring and capital structure advisory activity in the last quarter, which we expect to continue this year.

Lazard is currently engaged on more than 70 restructuring assignments worldwide, many of which are not publicly disclosed assignments. These assignments involve over 20 industry sectors. We are helping our clients with our deep talent and advisory experience in Chapter 11 and out-of-court restructurings, sales of distressed assets, debt advisory and capital raising around the world.

In North America we have been advising on 11 of the top 20 bankruptcies that were filed since January 2008. These include bankruptcies for Lehman Brothers, Tribune Company, Smurfit-Stone, Nortel Networks, Tropicana Casinos, Pilgrims Pride, WCI Communities, TOUSA, LandSource, Vertis and Hawaiian Telcom, among others. We continue to advise the UAW in its dealings with Ford, GM and Chrysler and to advise a number of automotive suppliers in the US and Europe.

We also are seeing a heightened level of restructuring and debt advisory activity in Europe and around the globe, including advising on the restructurings of Metrovacesa and Premiere, and advising the steering committee of note holders in connection with Belvedere’s restructuring. We’re also advising Ineos on its covenant negotiations, Olympic Airways on the sale of certain assets and Ecuador on its debt restructuring.

Corporate finance and other operating revenue was $90 million for the full year 2008 compared to $144 million for the full year 2007, and was $12.5 million for the 2008 fourth quarter compared to $47 million for the fourth quarter of 2007. These results were due to declines during the third and fourth quarters of 2008 in the value of fund closings by our Private Fund Advisory Group as well as declines in Equity Capital Markets transactions and private placements by our capital markets Group.

Asset Management operating revenue was $629 million for the full year of 2008 compared to $717 million for the full year of 2007, and was $125 million for the fourth quarter of 2008 compared to $231 million for the 2007 fourth quarter. Management fees were $568 million for the full year of 2008 compared to $596 million for the full year of 2007, and were $108 million for the fourth quarter of 2008 compared to $165 million for the 2007 fourth quarter.

Incentive fees were $35 million for the full year of 2008 compared to $67 million for the full year of 2007 and were $16.4 million for the fourth quarter of 2008 compared to $49 million for the 2007 fourth quarter. Our traditional long-only strategies generated incentive fees of $31 million in 2008 compared to $19 million in 2007. For the fourth quarter of 2008, fee from traditional long-only strategies were $13 million in 2008 compared to $10 million in the fourth quarter of 2007.

Assets under management at the end of the fourth quarter of 2008 were $91 billion, representing a 35.6% decrease from the level of assets under management at year-end 2007. The results primarily reflect $1.4 billion of net inflows during the 2008 full year, offset by $51 billion of market depreciation and the impact of the strengthening US dollar during the fourth quarter. There were $2 billion of net outflows as well as $20 billion of market depreciation and foreign exchange adjustments during the fourth quarter of 2008.

Mike Castellano will now provide more details on our financial results.

Michael Castellano

Thank you, Steve. Bruce and Steve have addressed the key elements of our growth strategy in core business results. Additional details of our results can be found in the earnings release. I would clarify a few points regarding our corporate operating revenue, compensation and non-compensation expenses, and our capital position. We will then be happy to answer your questions.

Corporate operating revenue was $22.5 million for the full year of 2008 compared to $57.0 million for the full year of 2007. The revenue for 2008 was adversely impacted by investment markdowns and losses primarily in the first quarter and by unrealized losses on private equity investments primarily in the fourth quarter. This was offset by gains in the fourth quarter of 2008 from the repurchase of a portion of our senior notes and from foreign currency transactions.

Corporate operating revenue for the fourth quarter of 2008 was a positive $25 million compared to a negative $7 million during the fourth quarter of 2007. During the 2008 fourth quarter, gains of $20 million on the repurchase of a portion of our senior notes, gains of $12 million on foreign currency transactions, and investment returns on average cash balances were offset by $12 million in unrealized losses on private equity investments.

The ratio of compensation and benefits expense to operating revenue was 55.6% for the full year of 2008 compared to 55.7% for 2007. We were able to contain our non-compensation expenses in the fourth quarter of 2008 compared to the fourth quarter of 2007. Non-comp expenses in the fourth quarter were $83 million compared to $102 million in the fourth quarter of 2007, excluding the provisions of approximately $17 million in each period relating to our tax receivable agreement and also excluding the amortization of intangibles of $300,000 in the 2008 quarter compared to $3.4 million in the 2007 quarter.

The full year 2008 non-compensation expenses, excluding transaction costs associated with the third quarter LAM equity charge, were $385 million in 2008 compared to $359 million for the full year of 2007, yet in each case excluding the provisions relating to our tax receivable agreement. The ratio of non-compensation expenses to operating revenue was 22% in 2008 and 17% in 2007.

Finally, our financial position remains strong. With approximately $1 billion in cash and marketable equity securities at the end of 2008, we are continuing to invest in growth areas of our business. To further optimize our mix of personnel, we also have been reducing staff in other areas and our back office to create greater efficiency, productivity, and shareholder value. As a result of these reductions and realignments, we expect to record a pretax charge of approximately $60 million in the first quarter of 2009.

As Bruce stated, our strategy is to focus on client relationships, and we will reinforce ourselves in areas of strength, invest in areas of growth, develop new products, contain costs and maximize liquidity, in order to take advantage of future opportunities. We continue to believe that we are well positioned in these markets and that our intellectual capital model should continue to exceed.

Thank you again for joining us, and we will now take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question is from Devin Ryan from Sandler O'Neill.

Devin Ryan – Sandler O'Neill

Good morning.

Bruce Wasserstein

Good morning, Devin.

Devin Ryan – Sandler O'Neill

Can you just give us some detail on the projected expense saves I guess as a result of the $60 million restructuring charge? And then what percentage of overall headcount is being reduced here?

Steven Golub

This is Steve. I mean, we don’t really view this is a cost saving issue at all. We view this as, as we look at our business, we continue to hire people; we continue to invest for growth in our business as a long-term strategy in developing client relationships. So what we are looking for is the right optimizing of mix of personnel to maximize our revenue generation as we go forward in time as opposed to thinking about it in terms of cost savings. It’s much more focused on what’s the right level of efficiency and productivity for us in a business model.

Bruce Wasserstein

I think one thing that’s different about the way we approach these things is we are looking at the next two to three years rather than the next quarter or half year. And what we are trying to do is anticipate the needs of the business world at that point in time. In order to do that, you have to reallocate, and like any company, set your priorities and be efficient about doing things. So that applies to all areas of the firm. It applies to new areas, new challenges in asset management. It applies to back office. It appears to the nature of our advisory activity because the nature of advice people had been seeking has shifted somewhat. And we are getting very much involved in things like debt advisory capital, structure advisory, which require somewhat different skills, and obviously generally capital markets. So what we tried to do is to figure out our strategic objectives and then mesh backwards in order to readjust for that, so as we all emerge from this period of economic turbulence, we’ve come out in a resilient very strong fashion. So that’s our main purpose, that’s our strategy. We want to continue to put Lazard in a preeminent position.

Devin Ryan – Sandler O'Neill

Okay. Thanks for that detail. And then just a question on the current environment. We’ve been seeing a number of announced M&A deals at least for the industry recently running into current problems due to either lack of financing or even in some cases financiers backing out. Is this a trend that – just want to hear your view, is this a trend that you expect will continue, accelerate, or are the deals that have run into problems is more a function of company or deal-specific issues?

Bruce Wasserstein

Yes. So the M&A business is a combination of a bunch of different types of businesses, different industries, different structures. And one overall trend doesn’t quite catch it. It is true that when the commercial banks are under pressure, the availability of liquidity is limited. On the other hand, you can see in large transactions where there have been cash financing available to the right parties. So I think the thing to think about during the year and the next two years is if you are a successful large company and if you had access to capital, what’s the optimal time to deploy it. And that’s what people are thinking about. And we don’t have a crystal ball. We don’t know when that will happen. What I can tell you is people are thinking seriously about that strategic issue, which is where will they be at the end of the economic crisis and is it a time with opportunity for the larger companies strategically. The second point is different industries have different dynamics. What's going to happen in natural resources is very different than what might happen in the auto industry. And so you have to track each of those. And for us, the nature of the advice has become much broader because in this type of climate, people want not only that they buy or sell assets, but also their capital structure, their strategy, and that runs from companies but it also runs to governments. And as you probably know, we have been quite active on the government front, most of which is not public, but some of which is. And so what we are trying to do is to adapt to this environment and at this point feel fairly comfortable that the firm will be in a strong position.

Devin Ryan – Sandler O'Neill

Okay. And then just lastly, professional services expenses in the quarter seem to be about 40% below the quarterly run rate for the year, and I know this could bounce around a bit. But just how should we think about this expense item going forward just given how low it was in the quarter?

Michael Castellano

Well, it’s one of those discretionary expenses that we look at. One of the things that goes into there is things like recruiting cost though that this recruiting environment – recruiting environment is a lot different today than it was a year ago. But we are looking at all of our non-comp discretionary expenses to see how we can continue to get better efficiency out of the whole system and pro fees are just one of the elements of that.

Bruce Wasserstein

Yes. Let's just dig deeper into that recruiting cost item. We're in an environment now where one is deluged with a large number of resumes just because of the turbulence on Wall Street. So we have to be very selective obviously on what we are prioritizing and who we’re interested in. But the needs for very high recruiting costs are obviously less in that type of situation.

Devin Ryan – Sandler O'Neill

All right. Thanks for taking my questions.

Operator

And moving on, our next question comes from Guy Moszkowski from Bank of America.

Guy Moszkowski – Bank of America

Good morning. Couple questions on asset management. First of all, I was wondering if you could provide us with an update on the relative performance of your strategy for (inaudible)?

Steven Golub

Guy, somehow we got a lot of feedback while you were making your comments. I'm not sure where that was coming from, but if you could repeat your question?

Guy Moszkowski – Bank of America

Yes, sure. I’m not on a speakerphone actually. I’m on a regular line. I was wondering if you could update us on performance track record of your key asset management product in sort of 2008 and then maybe three and five-year look-back?

Bruce Wasserstein

I think the question was, could you go over the long-term performance of your asset management products. You might think, Guy, of reconnecting because somehow we’re getting feedback if you’re still there.

Guy Moszkowski – Bank of America

Yes, I’m still here. I’ll try calling back.

Michael Castellano

Okay. Why don’t we just move on and then we will come back when Guy reconnects.

Operator

And moving on, we will take our next question from Lauren Smith from KBW.

Lauren Smith – KBW

Hi, good morning.

Michael Castellano

Good morning, Lauren.

Lauren Smith – KBW

I have a couple questions. I guess first off, if you could just give us employee count at year-end and what you ended the year with in terms of MDs?

Michael Castellano

We’ll be posting that information on our website presentation. It goes up later on today, but the end of the year we had just over 2,400 employees. That includes approximately 151 MDs in Financial Advisory and 56 MDs in our Asset Management business.

Bruce Wasserstein

I think the more significant there is – when you look at headcounts, there is a cyclicality to it. And really the cycle you want to look at is the cycle after year-end reviews, which actually doesn’t occur till after the calendar year. So the reason as described is that we can tell you that pro forma the headcount will be roughly 2,200, which is a reduction of roughly 10% from the high and is equivalent to our – roughly to our 2006 headcount.

Lauren Smith – KBW

Okay. So when you say pro forma, is that also including what you expect in terms of what will be the byproduct of this pretax charge in 1Q?

Michael Castellano

Yes, that’s right.

Lauren Smith – KBW

Okay, great. Thank you. And just in terms of when we think about comp, what is the mix of – I'm sure there is a scale depending upon seniority, but cash versus stock comp, and I’m just curious if that mix changed at all this year.

Michael Castellano

We don’t really – we don’t comment on the mix of compensation. Certainly we look at what’s going on in the industry. In the past, at the more senior levels, as you know, people have gotten a greater percentage of their compensation in equity, but we don’t really address anything specifically in a public note. It’s all individual.

Lauren Smith – KBW

Okay. And then just in terms of the repurchase of the sub-debt, I’m just – why now, and what do you – and was there – I guess this is sort of a two-part question getting to – trying to get to a core tax rate. But did that gain impact the tax rate in any way? And what do you – I know I can go back and get the interest rate as well, but what do you expect maybe the decline in interest expense might be when we think about going forward? And then I guess the broader question is if you could help us – or help me walk through the core tax rate because that seems to – seems like there is a lot of noise and seems like a lot of people are focusing on it.

Michael Castellano

Sure. I mean, a couple things. On the debt repurchase, we reduced our overall debt by about $500 million from the end of 2007. $430 million of that related to the conversion of the equity security units that we had issued at the IPO time, which effectively then became equity. But in the quarter we purchased about $60 million-plus of principal amount, which resulted in the $20 million gain that we recognized in the fourth quarter. That was just opportunistic purchases. With the – there were some people that were interested in selling that we became aware of, and we certainly felt that the spreads that were in the marketplace recently, it makes sense to just take some of that debt of. We don’t have any specific targets, as we’ve said before. We are perfectly comfortably with our debt levels, and if you can see, with $1 billion on the balance sheet of cash and marketable securities, $900 million of that is cash. We certainly have very significant liquidity to position us to go through any cycle and to take advantage of growth. So it just was an opportunistic thing to do. That gain, just like any other revenue item, just flows through the results and flows through the tax calculation, not a whole lot different than anything else.

Bruce Wasserstein

I think though you put your finger on an important characteristic of the firm, which is that over the last two years we’ve come to the point where we feel we have a strong balance sheet and you can do the numbers yourself. But we feel we’re quite strong.

Lauren Smith – KBW

Okay. So then the tax rate really – I don’t want to follow-up if necessary, but so – the tax rate credit then was really virtually all to do with the tax agreements that you have?

Michael Castellano

The tax rate really is – and as we’ve encouraged people to look at it, that tax receivable agreement goes back to the original IPO transaction and the step-up in basis. And as many companies have done in a similar situation, any savings that we receive from the tax benefit of that write-off is shared between the selling shareholders at the time and the company. So what we’ve said is, that’s really like tax. So just combine the provision for income tax and that tax receivable agreement, and that’s if you work your way all the way back to the last schedule in the earnings release, which is a very busy numbering schedule, you will see we’ve laid it out that way. If you take those two together, and you can see that’s the 23% tax rate that we had for the year. And as you look forward, without commenting on a specific tax rate going forward, that’s the way we encourage people to look at it. Don’t worry about trying to break that number between a tax rate and a tax receivable agreement. At the end of the day, that should be viewed as basically a tax equivalent one number. It’s just the US accounting requires us to split them.

Bruce Wasserstein

Now also just on your question generally as to tax rate, you have to remember that we have an international business. And depending on profitability of different units and different tax rates, you land up getting fluctuations, and that can be more – it can be currency related, it can be just one area of business is more active. And depending on that, you can get fluctuations.

Lauren Smith – KBW

Understood. Great. Thanks so much for taking my questions.

Michael Castellano

Okay.

Operator

And our next question will come from Guy Moszkowski from Bank of America.

Guy Moszkowski – Bank of America

Hi. Is that better? Can you hear me now?

Steven Golub

Much better.

Guy Moszkowski – Bank of America

Great. Okay, thank you. All right. So the question I was going to ask was, is there some update that you can give us on relative performance of your most significant key asset management strategies, sort of a 2008 and maybe a three and a five-year look-back? Just a relative performance to give us a sense for what we might forecast in terms of net flows to those strategies going forward.

Michael Castellano

As you know, Guy, we don’t publish specific performance for strategies because unlike mutual funds, a lot of the money that we manage are based upon customized portfolios, customized benchmarks, which without really understanding all of that makes some of those comparisons irrelevant. I think what I would say – a couple of things. You will notice we mentioned in the earnings release that the incentive fees that we had this year are dominantly from the long-only traditional business. We had 30, roughly $31 million, up $19 million in 2007, whereas the alternative business hardly produced any incentive fees this year, not unlike what everyone else is experiencing. Well, on an absolute basis, people might say, well, those numbers are relatively small, and I’d agree. And it is an indication though of what we said is on a relative performance basis. The products and the steps that we’ve taken over the last couple of years to improve the performance in the products are carrying through even in a market like we’ve been in. Finishing the year with positive net flows for the year is another strong indicator, we believe, of the relative performance of the strategies. The fact that we had negative flows in the fourth quarter is just as much a function, frankly, of the fact that, as you know, people are not funding new mandates. Some people may be taking a little money off the equity table. But even when they have got the mandates that they have awarded for new investment, they are still timing the market and delaying funding. And I think you saw some of that. Actually remember you saw that in the fourth quarter of last year with us where we had about $700 million of net outflows in the fourth quarter, but ended up with some decent net inflows in the first quarter.

Bruce Wasserstein

Yes. Without getting into the specifics of it, I think I hope you – I think it would be fair for you, Guy, to assume that in substantially more than the majority of our products, the products outperform their benchmark.

Guy Moszkowski – Bank of America

Great. That was exactly the follow-up question I was going to ask. So thank you for that. Very helpful. In terms of the performance fees on the long-only type products, can you help us a little bit with what the structure and the triggers of some of the key ones are, given that, as you said, they are not related to traditional alternatives?

Michael Castellano

These are just – with certain clients we have, the fee structure is such that it is a relative – it is an incentive fee based up on relative performance. These are just regular equity portfolios, but beyond that, we won’t comment.

Guy Moszkowski – Bank of America

And just moving on to the restructuring advisory business, and this is not something for which there is necessarily an answer, but it’s just a request if something can be done along these lines. Do you think that maybe you could develop some metric of restructuring mandate pipeline that could be related to fee potential, which maybe you could begin to provide on a regular basis? Because unlike M&A type advisory fees, it’s of course much harder for us to see an estimate from the outside what those fee pipelines might look like.

Bruce Wasserstein

Let me just – before we get into the detail of it, just pick up on your point and try to flush out the complexity of those, which is – the first thing is the nomenclature of all these areas is somewhat getting some expansion. Because just like M&A includes – in fact, advisory activities to companies, though what we call restructuring is a phrase that sounds like it’s companies that are going through some sort of court mandated reorganization. But in fact, it relates to anyone who is changing their capital structure and thinking about it. So in a broader definition, that takes in a lot of companies. Basically anyone who has the maturity coming up in the next couple of years begins to think about, well, do I have the ideal capital structure and what are my alternatives and what can I do. And that may eventually result in asset sales or equity issuance or private placements or it may land up with a court situation or pre-packaged court situation. So we look at it more broadly. And having said that, the measure we use is we know these mandates, but there are two difficulties. One is timing, timing on the recognition of revenues. The way this works often is we get a retainer or monthly fees, and there is some backend incentive fee that either may not be determined at the beginning or is sometimes on some formulae basis or maybe something negotiated in the future. So unlike an announced M&A assignments where everything is on a contract, you have to go on an intuitive feel of what you think about the portfolio of these assignments where things will land up. The last point I wanted to make was one on timing, which is historically – and you heard Steve talk about that, restructurings take a six to 18-month time frame for the fees to roll in. Every cycle is different, and it is possible that that time frame may really vary significantly from case to case during this period, because there are more situations where a drawn-out process can’t be financed, which would accelerate the resolution of the situation. Example of that being obviously some of the activity in Lehman Brothers where we’ve been the restructuring advisor. And so when we look at this, we know that we’re extremely active in this area and we know that there will be an income effect over the next period of time. Precisely when that will occur is something that at this point would be very difficult to forecast. Mike?

Michael Castellano

The only thing I’d add to what Bruce is saying, Guy, is we’ll think about it some, but obviously a number of our assignments are non-public. And that makes the metric harder to kind of deal with. That's why we tried to aggregate some things for you. But we'll take it under advisement and think about it some.

Bruce Wasserstein

For example, Guy, the majority of our government assignments are non-public.

Guy Moszkowski – Bank of America

Okay. Much appreciated. Thanks for the clarification.

Operator

Our next question today is from Dan Kurke [ph] from Seacliff Capital.

Dan Kurke – Seacliff Capital

You guys there?

Michael Castellano

Good morning, Dan.

Dan Kurke – Seacliff Capital

Good morning. Just a follow-up on Guy’s questions on the incentive fees for the Asset Management business. Are those sustainable with equity markets continuing to decline?

Michael Castellano

Again, with the traditional products being the source of most of those incentive fees this year, I’d say yes.

Dan Kurke – Seacliff Capital

Okay, great. That’s it. Thank you very much.

Michael Castellano

Okay.

Operator

Moving on, our next question is from Justin Hughes from Philadelphia Financial.

Justin Hughes – Philadelphia Financial

Good morning, and thanks for taking my question.

Michael Castellano

Good morning, Justin.

Justin Hughes – Philadelphia Financial

On the debt repurchase, you said you’ve repurchased $60 million of face value and you had a $20 million gain. So I’m assuming you spent $40 million in the quarter?

Michael Castellano

Correct.

Justin Hughes – Philadelphia Financial

And that’s about what you had been saying the last couple of quarters on share repurchase. So did you repurchase debt in lieu of repurchasing stocks?

Michael Castellano

We look at the balance of – either one. We did repurchase, as we outlined in the earnings release, a significant amount of, what I’d call anyway, a significant amount of equity in the fourth quarter. And we’ll continue to look at the trade-offs between where the pricing is on the debt and the stock. We still have $120 million worth of remaining authorization under our debt repurchase program.

Bruce Wasserstein

It’s not what you seem to be assuming is trade-off. We don’t assume. It’s not necessarily the case that you do one and not the other. You might do both. You might do neither.

Justin Hughes – Philadelphia Financial

Okay. Yes, that was my question. I thought maybe you saw more value in the debt and the equity at that time, but it sounds like you did both. And then my question was on the private equity market that you took in the quarter, what was the percentage markdown that you took on those investments?

Michael Castellano

Well, our total private equity investments on our balance sheet are in the 10-Q, but the percentage really – it goes company-by-company, as you know. So rather than looking it on a portfolio basis, we really just look at it on a – obviously have to look at it on a securities by security basis. And it varied by different positions.

Justin Hughes – Philadelphia Financial

Okay. So this isn’t private equity fund that you’re invested in; this is individual holdings?

Michael Castellano

Well, it’s private equity funds, but the companies within the portfolio is what gets looked at.

Justin Hughes – Philadelphia Financial

Okay. But you don’t know what the weighted average markdown was?

Michael Castellano

We’re not going to talk about that.

Justin Hughes – Philadelphia Financial

Okay. Thank you.

Operator

(Operator instructions) And our question – next question, excuse me, will come from Michael Wong from Morningstar Investments.

Michael Wong – Morningstar Investments

Hi. I was just wondering why was there a big change in the amount of investments that are done under the equity method from the end of 2007 to the end of 2008.

Michael Castellano

That’s primarily related – there are two investments there. In January we had closed on a SPAC, Sapphire Industrials, where we made an investment in that of about $62 million and the other $10 million related to an acquisition we closed, the 50/50 joint venture we had also in the first quarter. There haven’t really been any changes in that number since the end of the first quarter.

Michael Wong – Morningstar Investments

Okay. Are your – most of your management fee is based on a percent of committed capital or invested capital at the moment?

Michael Castellano

The management fees in Asset Management are all based upon, of course, committed – I’m sorry, the invested capital, I mean the assets under management.

Michael Wong – Morningstar Investments

Okay. And just a question about what’s exactly in your other investments on the balance sheet and the increase from the third quarter? Hello?

Michael Castellano

Yes, I'm just trying to – just trying to recall all of it. I mean, it’s all going to be in the 10-Q. It has to do with that SPAC investment that you pointed out before. But let me – I’m sorry, that’s compared to the end of the year. Michael, let me – why don’t we just get back to you on that?

Operator

And that’s all the time we have for questions today. Thank you. This now concludes the Lazard conference call. We thank you for joining us.

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Source: Lazard Ltd. Q4 2008 Earnings Call Transcript
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