Good morning and welcome to Lazard’s fourth quarter and full year 2009 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 provided at that time.
(Operator Instructions). At this time I will turn the call over to Judi Frost Mackey, Lazard’s Director of Global Communications. Please go ahead.
Judi Frost Mackey
Good morning and thank you for joining this conference call to review Lazard’s results for the fourth quarter and full year of 2009. Participating on the call today are Lazard’s Chairman and Chief Executive Officer, Kenneth Jacobs and Chief Financial Officer Michael Castellano. A replay of this call will be available on our website www.lazard.com beginning today after 1pm.
Today's call may contain forward-looking statements. These statements are based on our current expectations about future events that 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.
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.
Today's discussion may also include non-GAAP financial measures. A description of these non-GAAP financial measures and a reconciliation to the comparable GAAP measures are contained in our earning release which has been filed with the SEC in our current report on Form 8-K.
For today's call we will focus on highlights of our performance, the details of our earnings can be found in our press release issued this morning and our investor presentation, both of which are posted on our website. Ken and Mike will be happy to answer your questions following their remarks.
I will now turn the call over to our Chairman and Chief Executive Officer, Ken Jacobs.
Good morning everyone and thank you for joining our call. During my first two months as Chairman and CEO, I’ve had a chance to spend time with many of our clients and partners worldwide in both, the financial advisory and asset management businesses. Lazard is better positioned today in its two core businesses, financial advisory and asset management, that at anytime in my 22 years at the firm.
We ended 2009 with the third strongest quarter of operating revenues in our history. Operating revenues for the second half of 2009 were up 40% of revenues for the first half of 2009. Operating revenues for the year were down just 3%. Financial advisory revenue was up 24% for the fourth quarter of 2009 over the fourth quarter of 2008 and was down just 3% for the year.
Financial advisory revenue for the second half of 2009 was up 38% over revenue for the first half of 2009. While M&A was down 35% through the year during one of the weakest M&A environments in history, M&A in the fourth quarter increased 37% over the third quarter of 2009. We captured M&A market share throughout the year. Our global restructuring business had a record year, up over 200%.
Asset management revenues increased 63% for the fourth quarter of 2009 over the fourth quarter of 2008. Assets under management at year end increased 42% to $130 billion, up from $91 billion a year earlier. Management fees for the fourth quarter were up 42% over that same period. We had near record inflows of more than $10 billion for the year.
Few long-only equity asset management firms can demonstrate such a performance for 2009. Our globally diversified asset management business is positioned well for 2010. So why are we in such a strong position today? This is testament to the success of our strategy and the strength of our model.
Lazard strategy is simple and powerful. It's built around two businesses. Financial advisory and asset management, both generate returns from intellectual capital, not financial capital. We take no risks that could threaten our firm. Success in each business enhances the Lazard brand, and then enables the firm to compete on equal footing with firms many, many times our size without the commensurate reliance and inherent risks and conflicts associated with capital.
Lazard is a global business. Our historical position, our ongoing investments in both our businesses both currently and in previous cycles give us the scale to compete against our largest competitors again on a global basis and distinguish us from the financial advisory boutiques. Lazard's model is tested and resilient. Our largest competitors will need to adjust and reinvent their business models to adapt to the changing financial and regulatory environment, our smaller competitors are trying to anticipate and develop the models and culture necessary to drive this big growth.
During this period of turmoil, as in previous ones, we stayed focused and direct our energies on providing great advice to our financial advisory clients and investment solutions to our asset management clients. Lazard's growth will come again from our core businesses, which we've grown successfully over previous cycles. Opportunities for growth in our two core businesses are substantial. Some of that growth will come naturally from our recovery of the financial markets and the economy globally.
The breadth of our franchise should position us well to capitalize on that recovery. Additional growth will continue to come from investing in our businesses through the hiring of bankers and asset management professionals to complement the already deep and experienced team. The stability of our platform and some of the changes to our compensation policies which are detailed later gives significant advantages in attracting top bankers and asset management professionals.
The substantial existing scale of our platform allows us to be discerning about both the pace and the quality of the higher as we move going forward. Lazard's financial model, historical position, investments over the last cycle should provide substantial operating leverage to our shareholders as the new cycle commences. We are entering this cycle with both our core businesses showing significant momentum. We are positioned to capitalize on our on-going investments and historically strong position we enjoy in the markets in which we compete and we entered 2010 with what we believe is the most competitive model in the industry.
As you have seen in our earnings release, our net results for the 2009 fourth quarter and year were impacted negatively by special charges and changes to our compensation policies. Mike, will discus this special charges and changes in policy in detail following my remarks. I firmly believe that taking these special charges and making these changes to our compensation policies, are the right thing to do at this moment in time.
We expect the charges and changes to our compensation policies to enhance the competitiveness of our model and position us to drive shareholder value. Key to achieving these objectives for our shareholders will be our discipline in the compensation process going forward. We are committed to growing annual compensation expense at a slower rate in revenues and to achieve over the coming cycle compensation levels on average consistent with the targets we established when we went public in 2005.
Well, it may not be immediately apparent from our GAAP numbers, we have in fact held aggregate 2009 current cash compensation plus deferrals awarded during the 2009 compensation cycle inline with 2006 and 2008 levels. There is quite a bit of detail on pages 17 and 18 of our earnings release, which will enable shareholders to better understand our compensation and benefit expenses, the special charges and the changes in our policies.
Mike will now comment in more detail on our results and will highlight some of our business activities.
Thank you Ken. First I'd like to point out a few additional highlights. As Ken mentioned this morning, we reported strong operating revenue across all business lines. However, the net results were negatively impacted by significant special charges in the fourth quarter related to compensation and changes in our compensation policies. As a result, on a US GAAP basis, we reported a net loss of $1.64 per share in the fourth quarter and a $1.68 per share for the full year.
And on a fully exchanged basis before the special charges, we reported a net loss per share of $0.46 for the quarter and net income per share of $0.09 for the full year. Each quarter in 2009, beginning with the second, we demonstrated continued momentum rebounding from the lows of the first quarter. Since then and in each quarter, total operating revenue significantly increased over the prior quarter. And as Ken mentioned in the fourth quarter our 2009 operating revenue was the third highest quarterly revenue in our history.
In financial advisory, operating revenue from the quarter for our M&A and strategic advisory as well as our capital markets advisory activities was $314 million, the highest level since the fourth quarter of 2007. We continue to advise financial advisory clients on complex global M&A and other strategic transactions. Our earnings release includes a number of these transactions completed during the quarter, as well as those that are still pending.
These include Barclays' $13.5 billion sale of its BGI business to BlackRock, Resolution’s £1.9 billion acquisition of Friends Provident, Anheuser-Busch InBev’s disposition of several of its non-core assets following their merger and most recently Kraft's pending acquisition of Cadbury.
Operating revenue for our restructuring activity was $103 million in the quarter as restructuring activity remains at relatively higher levels globally.
As Ken mentioned, our asset management business reported another outstanding quarter with nearly $5 billion in net in-flows for the quarter and a 15% sequential increase in management fee revenue over the third quarter of 2009. We also had a strong quarter for performance incentive fees with $41 million, brining the full year total to $75 million which is more than twice the incentive fees for the full year of 2008.
In 2008 and throughout 2009, we commented that incentive fees were primarily from traditional loan only strategies, while the fourth quarter included incentive fees from these strategies, we also had $24 million in performance fees from alternative strategies up from the $5 million that we reported in the fourth quarter of 2008.
Now turning to compensation expense. As detailed beginning on page eight of our earnings release, during the fourth quarter of 2009, we have taken special charges and as part of our 2009 compensation cycle, we have changed our compensation policies.
On pages 17 and 18 of the release, you will find additional details; statistical information which we believe will be useful to understanding our compensation expense. First, we incurred a previously announced charge of $86.5 million for the accelerated amortization of restricted stock units previously granted to our former Chairman and CEO who passed away in October.
We are also accelerating divesting of differed cash incentive compensation that was awarded as part of the 2008 compensation cycle. The acceleration resulted in a non-cash special charge of $60.5 million in the fourth quarter of 2009. And therefore we’ll serve to reduce our non-cash expenses in 2010 and in future years.
As part of our year end incentive compensation process, we changed the mix of cash and deferrals from the mix followed in 2008 to be in line with the practices followed in 2006 and 2007. This change increased the current cash and increased the differed equity components of the incentive comp and we eliminated the differed cash component. While the economic cost is the same regardless of mix, this year's change in mix increased our compensation ratio by approximately 900 basis points.
We've also taken additional steps in the first quarter of 2010. First, we have implemented selective staff reductions. We therefore expect to take a pre-tax charge in the first quarter 2010 of approximately $90 million including a non-cash component of $41 million relating to restricted stock units previously granted to individuals who were being terminated.
Second, we're continuing to hire senior talent and to redeploy our human capital to areas where we see high potentials for business growth, and finally we amended a previously approved retirement policy which accelerates the accounting, the deferred stock awards and will result in a non-cash pretax charge of $24.8 million in the first quarter.
We ended 2010 with a base compensation of approximately $1.06 billion. This is (inaudible) current levels, no staffing increases, no changes in the mix between current and deferred compensation. We all know all those things could change.
As Ken mentioned our goal is for annual compensation expense to grow at a slower rate than revenues in order to achieve over the cycle, compensation levels on average consistent with the targets we established when we went public in 2005.
We would expect that any increase in compensation will be a combination of cash and equity base. Therefore, under US GAAP, compensation expense in the current year would only include the cash component for the increased revenue.
I also want to say a few words about non-comp expenses. As you know an important measure we follow is the ratio of non-comp expenses to operating revenue. The fourth quarter 2009 ratio decreased to 19% from the 21% in the fourth quarter of 2008 and compared to 20% in the third quarter of 2009. The full year ratio for 2009 decreased to 21% from 22% in 2008. While non-compensation expenses were down 11% for the full year, we saw an uptick in the fourth quarter to a $102 million from $83 million in the fourth quarter 2008 and from $88 million in third quarter of 2009.
The fourth quarter increase was driven primarily by increased business activity as reflected in higher marketing and business development expenses and professional fees.. The increase in assets under management also contributed to the increase in fund administration and outsourced services.
As Ken mentioned, we are well positioned as we enter 2010. We continue to maintain a strong liquidity position with over $1.1 billion at the end of the year in cash, US government and agency securities and marketable equity securities.
Our businesses continue to generate significant cash flow and we have no scheduled debt maturities until 2015. I will now turn the call back over to Ken to summarize and we will be happy then to take your questions.
Thank you, Mike. As a preface to the Q&A, I would like to share with two questions I have been thinking a lot about. First, how are we positioned as firm going into this cycle versus previous cycles?
Second, how are we going to grow and drive shareholder value position. Competitively our position has never been stronger. Our larger competitors while benefiting from the improvements in the financial environment are struggling to adapt their business models to the changes in markets and likely regulatory reforms resulting from last year's financial crisis.
Our smaller competitors are investing heavily to build out geographies and industry groups. If history is any guide, scaling boutiques into a global platform like Lazard is difficult. On the financial advisory side of our business, the demand for advice from independent financial advisory firms has never been stronger. Ours is the only independent platform that is built out globally across all major industry groups with a deep and experienced team.
On the asset management side of our business, we enter this cycle with strong momentum. We have never had a broader set of offerings and investment solutions for our clients. Assets under management are near record levels and inflows were exceptionally strong in 2009. The investments we made in diversifying our asset management business in the last cycle should hold us in good stead for the future.
Second, how will we grow and drive shareholder value? We will drive shareholder value as long as we grow revenues at a faster pace than either our annual compensation or non-compensation expenses over the cycle. We can achieve that result by maintaining significant employee ownership and by being financially disciplined in the way we run the firm.
Growth will come from the investments we make in people and businesses as well as the natural progression of the business cycle. With regard to investment, we need to recognize that this is a cyclical business. And it is always best to be investing counter cyclically. Year-to-year performance is difficult to predict so our goal has to be to enter and exit each cycle significantly stronger than we were in the previous cycle. The competitive environment we faced today as we enter the next cycle is probably more favorable to us than at any other time and particularly coming out of the trough in 2002.
Over the last cycle we grew financial advisory revenues from the peak in 2000 to the peak in 2007 by 62% or outstripping the 7% growth in M&A volume and the 30% growth in the global markets. From the trough in 2002 until what appears to be the trough. In 2009, we grew financial advisory revenues by 86% again outstripping the 26% growth in M&A volume and the 47% growth in the global markets. We did this during past cycles by entering new businesses like restructuring at the peak of the cycle and investing in M&A and rejuvenating our asset management franchise at the trough of the cycle.
The investments we are making that prepare us for the next cycle include the continued build out of our asset management platform and increasing the breadth and depth of our financial advisory platform. As an example these investments include a capital structure advisory effort to help governments and corporations come to grips with a significant de-leveraging that is enfolding through out the world, this effort compliments our market leading M&A and restructuring franchises and is an increasingly important part of our business and when we will be speaking about more in the months to come.
We are entering 2010 with great momentum in both our businesses which is reflected in our revenue performance for the second half of 2009 and in our strong market position.
Finally, before turning over this call to your questions I would like to make a short comment about Bruce Wasserstein. Bruce left us a great legacy. He energized the firm, built its spirit, retained and attracted outstanding talent in both the financial advisory and asset management businesses and integrated a collection of good businesses into a great firm.
Thank you, Mike. Mike and I will now be happy to take your questions.
(Operator Instructions) Our first question comes from [Patrick David] with Merrill Lynch. Go ahead sir.
Good morning. You mentioned a target of getting back to a compensation ratio that you had targeted when you were in public. Are you comfortable kind of giving a range like assuming revenue stay around where they are, where you are pretty comfortable you could fall in 2010?
Good morning Patrick, it’s Mike. I think at this stage no one has got a crystal ball as to what revenues might look like, what the environment might look like et cetera. But maybe I could try to address your question with a little bit of a mathematical exercise.
And I think you’ll also find a little help in developing your models in one of the charts that we are going to include in the web presentation so to give a sensitivity of revenue growth versus what that might mean trends of compensation. But we’ve indicated in the release that we enter into 2010 with the $1.06 billion of compensation for at least the current employee group.
And of course we do intend to hire people opportunistically and we certainly are in an environment where we would expect revenues to be growing. But if one were to say why would it take mathematically to get back to a range that we talked about at the IPO, at 10.60 with the growth in revenue also with the growth in comp slower than revenue if you just would hypothetically assume maybe 50% of that went to comp and recognizing or expecting that at least in 2009 if the split was 63% cash 37% equity, only a portion of that increase in notional comp would hit the US GAAP numbers. You could sort of get back to mathematical calculation I would say there is something like a $2 million, billion plus range, you could be close where you are.
But again, who knows what the market environment look like. What I say though is that we provided a lot of information on page 17 and 18 of the release to give you an idea of what our compensation structure has looked like both on a US GAAP basis and on a notional GAAP basis, notional being the end of the year, what do you tell people they earned? You got cash, you got equity and we all know US GAAP cushions that equity expense out into future years.
So we tried to provide more clarity as to what compensation structures have been in the past, what they were for 2009, and part of what I was saying with that is that while I'm not going to say what our ratio might be with any specificity. We're going to provide information like this, so you can judge have we followed that discipline that Ken mentioned we need to have to grow compensational rates slower than revenue.
I want to confirm that you do not expect to be subjective to the UK bonus tax?
That is correct.
You didn't mention the capital market fund much in your comments, and we felt pretty nice growth there. Can you speak to maybe the efforts you are making in growing that business and remind us how it works in terms of its relationships with Lazard Capital markets.
This is Ken. Let me comment on it. First comment on it, and then I'll turn it to Mike. Speaking our capital markets effort falls under what I described earlier as our efforts in the capital structure advisory area, okay and when I think about that business there again are two parts to it one the advise we are giving and then the second is how we get paid and what we are increasingly finding is that there is a demand for this advise.
We are increasingly finding that we can get paid in multiple ways as a fee stream that is advisory fees or alternatively as participating in offerings and that’s important because that’s a very profitable way for this firm to take advantage of this great level of expertise we have in this area.
Is there a relationship with the sales in trading and research aspects [so] those our capital markets or not?
Yes, we have the business alliance with them and we actually originate and the private company was our capital markets under rights take all the risk and distributes.
Okay we are not incurring the risk of any of the underwritings that are taking place there.
Okay great and just finally could you update us on the wealth management build out and where that stand and how it going?
Look that’s a new initiative for us it falls under the umbrella of our asset management area, we continue to see opportunities its one of the several areas within the firm where we've identified opportunities for growth.
Our next question comes from Michael Hecht with JMP Securities. Go ahead.
Michael Hecht - JMP Securities
So I just wanted to first the big picture question on strategy for Ken if you talk a little bit about any changes you foresee the firm strategy within financial advisory or asset management, clearly we pointed to a lot of things that are working very well at Lazard but surely there must be a few areas you would like to further bolster your progressing?
Frankly, the wonderful thing about Lazard is pretty simple. The strategy is also pretty simple, it's pretty resilient and it's been tested by time. I frankly don't think there is a lot to do or there is the need to do much with regard to the core strategy. I think the opportunities in our two core businesses financial advisory, asset management are really substantial. I think they come about as a result of some of the disarray in the markets, changes some of the larger firms. What we are going to keep a careful eye on is opportunities to hire. We are going to do it in a as I said in a disciplined way.
And we can afford to be disciplined because I think our platform is pretty [good] at the moment and so we can really be careful about making sure we are doing things which are really additive and I think we are going to find substantial opportunities to do that over the coming months and years.
Michael Hecht - JMP Securities
Okay, that’s fair. And then on the capital management philosophy I mean the $1.1 billion of liquidity a point to remain certainly seems prudent in this day and age, but just want to reconcile that versus the fact that Lazard's businesses not terribly capital intensive. So just help us think about the priorities between buybacks, dividends or acquisitions in particular how that might contrast with prior management?
Right, well look, the last couple of years have been really a pretty unusual period of time for the financial markets and I think you really paid to have a very conservative balance sheet during that period of time. We would like to think of ourselves, just fairly expert when it comes time to thinking about capital structure and how we use our capital and such. And so we are going to take a careful look at the capital management, the mix between what we keep in cash, pay down the debt and very importantly share repurchase. That’s going to be something we'll carefully think about over the next several months.
Okay, that’s fair and then just within the financial advisory business I mean you ended the quarter on about 146 MDs, where do you end '09 and what are you guys budgeting for '06 I mean in any sectors or geographies you are targeting there.
My guess is the MD count will come down a bit as a result of some of the changes we’ve made in staffing at the end of this year which I think is a healthy thing to do but also we are going to be continuing to recruit as we see opportunities in the marketplace. It's really a shift in making sure that we’ve got the best possible people on this platform which I think we do. Again as I said, I think we can be pretty discerning about where we hire clearly, we want to continue to build out the asset management business because we’ve really got a nice track record and good performance across a range of products so taking advantage of that is one of our priorities at the moment. And on the banking side, when I look at the franchise senior bankers who can make a difference, we always hire them.
And then just last one for me to follow up and I'll get back in queue but just so and it sounds like on the financial advisory side, the focus will be more on productivity and if I kind of calculate rough numbers, productivity per MD was nearly around $6.5 million for full year '09 versus the peak of more than $9 million in '07. I mean, do you expect upside from '09 levels as we head into 2010?
Oh yeah, I think that frankly if we get a recovery in the M&A business, between what looks like a reasonably stable restructuring business, recovery in the M&A business and potentially some success in this capital structure advisory effort which I anticipate, you should see some productivity gains. I mean we saw that in the last cycle very substantially, so I wouldn’t be surprised if we see it here as well. It's going to be a mix, look as I said in my comments, its going to be a mix of the leverage we get off having a scale platform plus incremental hiring is where they really make a difference should be able to drive significant value to shareholders here.
(Operator Instructions) Our next question comes from Daniel Harris of Goldman Sachs. Go ahead.
Daniel Harris - Goldman Sachs
I was hoping if you could just sort of flush out a little bit more of the rationale behind changing the mix of the compensation. You've done like a stunt twice in two years, getting back to where you were before, I mean was that pressure internally for employees, was that something else to remain competitive externally. How should we be thinking about that going forward?
Look in my mind this is playing offence not defense. When I look at the outside world and I think of what's driving people with regard to their compensation policies particularly amongst the large firms, the factors that are in-play there really aren’t applicable to us. The [niche] firm is driven by intellectual capital not financial capital. When you have financial capital, you not only have to get a return for the capital, thus some of the policies that we've seen, thus the different sharing of compensation between the capital and the employees, but more importantly when you have a capital intensive firm, you really have to think about when the capital is getting paid back and what the return on capital is going to be and I think it gets to the heart of the suggested magnitude of the deferrals and also the drawbacks. We're in a different business, compared to the large firms where in many instance 90%-95% of the revenues are associated with capital, when only 5% or 10% is associated with the advisory business. Our business is all advisory; they are all advisory revenues, whether it’s on the financial advisory side or the asset management side. So, when you think about, we don’t have this disparity between risk and capital that the other firms are addressing.
And then second of all, on our platform, it’s a real advantage I think today to have a mix which is more reasonable from the standpoint of attracting people and frankly speaking with regard to retaining people, when you are paying huge amounts in terms of deferrals with callbacks associated with it, I just don’t think you are getting a [$1] on a $1 in terms of what you are paying people.
So frankly speaking, we've been able to I think withstand some of the pressure around pay this year, by making a more attractive mix which from an economic standpoint has to be a benefit to shareholders over the long run.
Daniel Harris - Goldman Sachs
Okay fair enough. And does the changes you guys made this quarter, this is just sort of (inaudible). On the balance sheet, the accrued comp looks like it’s a vastly different number than I think we've seen. Is that just timing or changes? How do we think about that?
Well, that becomes a natural result of the change we made in the fourth quarter of going from a model last year that had, and you can see these percentages on page 17 of the release where you had roughly 40% of year end comp being paid in cash and 60% in equity. Whereas this year it's basically a little bit flipped at 63% in cash, 37% in equity. So, you just end up having with a higher current compensation payable.
Daniel, one more comment on this, which I forget to mention is that we're still targeting very significant equity towards our senior people where it’s valued most highly by them and also most valuable to the franchise in terms of retention, and I think that's important is that where you're going to get your biggest bank for the buck on providing deferrals and equity are going to be the people who most value it.
Daniel Harris - Goldman Sachs
Moving over to the M&A front, I was wondering can you guys comment a little bit on any of the impact on the backlog or your conversation that you've been having with clients with regards to different changes in the regulatory environment that's been happening in the US or even overseas and how you think CEOs are feeling about that, just in general the changes there and then to some extent whether or not that's impacting their decisions to move ahead or not move ahead with the M&A activity?
I'll start in the general and try to be a little specific about industries. For my experience M&A is fundamentally driven by three factors. Optimism, financing, valuation, there are others, but those three jump to the forefront in my mind. Clearly, where we sit today, people are more optimistic than they were a year ago.
With regard to financing, it's obviously better today again than it was a year ago. Valuation on the other hand, I still think it's pretty uncertain because there is a real divergence of opinion, up in the markets about what exactly is going on with the economy, not only short-term, but medium and longer term.
I think you're seeing more discussion, more activity, clearly than was the case a year ago, but I'm not sure you see a burst of activity until some of these questions around valuation get resolved and clearly there is more sentiment moving perhaps in more positive way now there was six months or nine months ago. But it’s still a bit uncertain, so that’s sort of the first comment general.
Second comment industries, you have to look really industry by industry to see the real picture and the financial services industry is going through a revolution. No other way to put it, both in terms of de-leveraging, capital raising and very importantly in terms of asset dispositions.
I’m not sure the statistics exactly today, but our financial services people I think led by Parr is one of the best teams on the street believe that there is several hundred billion dollars worth of assets for sale right now. That doesn’t mean all those deals are getting done, will they ever get done because it’s not clear there’s capital out there to buy everyone of these assets. But there is potentially an enormous amount of activity in the financial service sector over time.
Then you look what’s going on the United States in particular and again the trend in financial services is really a global trend, but the effect of the first year of the President’s agenda in Congress, healthcare, energy in particular have to some extent frozen M&A activity in both of those industries.
And I think we are going to see a thaw on that this year as a result of some of the resolution of the concerns about where healthcare comes out and also what’s going to happen with regard to energy and those are two very important sectors. So if you take financial services which is a big sector, healthcare, energy I think as some of these issues around capital and then importantly some of the legislative agenda gets somewhat clearer, I think we are likely to see a bit more activity as well.
Our next question comes from Devin Ryan with Sandler O'Neill.
Devin Ryan - Sandler O'Neill
Can I get some color on the restructuring business and whether you guys are seeing the pace of new engagements, lowered just as the capital markets are opening up a bit here? And not sure if you can give this in any context of the level of engagements, I believe a couple of quarters ago you said that you are working on over a 100 assignments?
Let me sort of give a general picture and then Mike can comment specifically about this. Look there is no question that as the markets opened in May, the build of the restructuring backlog started to level off. I think you see it here, elsewhere you can just sort of see it by reading the newspapers. That said I think we go into 2010 with a pretty substantial amount of activity still.
And there is certain sectors of the economy which are still really struggling and in one area in particular where we’ve seen a real pickup in activity in the last couple of months is obviously the commercial real estate sector.
So it's kind of a mixed picture, but sort of a good news in this business is that we have a decent amount of activity and backlog going into 2010. It's not like the last cycle where it just stops, I mean realistically when you go back to 2003 and 2004 as the markets recovered, it just pretty much stopped.
We are not experiencing that right now and then the other aspect of it is that when you look at our restructuring business today, its very different not only from everybody’s else’s restructuring business I mean we’ve spoken about the size of it relative to anybody else’s but its also different in terms of how its diversified geographically. In the last cycle, it was primarily a U.S. business.
In this cycle, we really have done an excellent job of building out the franchise in Europe and actually around the world. And I think what we are seeing in Europe is an activity level that is higher and the build stronger than in the US. And so that probably puts us in a reasonable place in 2010. But look it's really very much a function of the economy in the markets, we are not seeing the [cliff] that we did in 2003 and 2004 as we came out of the last cycle.
Devin Ryan - Sandler O'Neill
And Mike if you could comment on the level of engaging that (inaudible) as well.
Well I think we have a couple of comments in the release the most important one I guess the most important too is during the year we’ve been working on close to 140 transactions and there are still roughly 70 transactions that are still engaged and which is down slightly from where it was at the end of the third quarter but still pretty higher level I think it was close to 80 at the end of the third quarter.
So as we’ve had some work completions in the quarter it's obviously being replaced with some new assignments but not the same pace before. I guess if we look at it though it’s levering a little bit of what Ken said, yes you actually got some of the industries that haven’t been touched but you’ve also got a lot of debt that’s coming due from a high issuance period as the high yield market some of that debt has been pushed out a bit.
But we look at that sort of the next backlog built because the fundamental issues in some of those companies the liquidity and debt covenant issues haven’t really been addressed and so we would not be surprised given what we and others expect to be the continued high level of defaults for that activity to continue throughout the year.
Devin Ryan - Sandler O'Neill
And just thinking about 2010 if you have 70 assignments do you think it's likely the most of those would be completed over the next year which I guess could build well for obviously success fees at least for the next year.
Yeah as you know these transactions take generalizations are always dangerous, take anywhere from six to 18 months to complete restructuring is normally on the longer side so I would expect a number of them to be completed through out the year exact timing is almost anybody's guess.
Devin Ryan - Sandler O'Neill
Just moving on I just want to make sure I am clear on this but can you guys explain again why you are making staff reductions at this point in the cycle and just, is it primarily related just to the coloring of less productive bankers or seeing your bankers and I guess hopefully upgrading those seats, is that primarily what it is?
I think look we have been doing this for the last several years, it’s a continuation of that policy. Frankly, we see the ability to upgrade in certain areas is being pretty significant in this market place and its always a tough thing to talk about people in those terms but the reality is to be a vibrant franchise like this you have to through this. And then if you got a platform like ours and you've got some of the issues around some of the other platforms that are out there. I think it gives us a great opportunity to hire some bankers in areas where I think it makes the difference here.
Devin Ryan - Sandler O'Neill
Great, and then just lastly you guys have had very strong net inflows in asset management over the past couple of quarters. Can you just give any color on commitment levels currently or expectations for additional for us in future quarters?
Well, as you know like the banking backlog and pipeline, we don’t give specific guidance on the asset management side as well. I think what we have been seeing this year is we really in a sense getting the fruits of the investments that we have been making over the last several years in upgrading both the research professionals that we hopefully have ended driving improved performance in the funds a much better and we are targeted effort toward marketing particularly is our more successful funds and which you are also seeing now in where we gain in this website presentation will be posting later.
We’ll be giving a snapshot like we did last quarter of the select group of mandates that we have gotten funded over $200 million and so significant mandates and you see that they are coming not in any one particular area from any one source, it’s a broad base of different client profiles that are now giving mandates to us and they are going across the whole bunch of different strategies. So, I think it’s a overall repositioning and upgrading of the business that we have done and spend a lot of time over the last several years. And I think we are continuing to be invited to new pitches and we are got a success rate that’s pretty good.
(Operator Instructions). Our next question comes from Howard Chen of Credit Suisse. Go ahead.
Howard Chen - Credit Suisse
Just a follow-up on the asset management flows, are you still benefiting from the backlog of the unfunded mandates that you spoke to last quarter, are we in a more steady state there?
I think we are pretty close to that steady state at this point, as you know there were mandates that weren’t being funded by anybody I don't think in any firm so that sort of fourth quarter last year and first two quarters of this year and then it began to catch up and as I said in the third quarter, don't annualize the $7.7 billion that we had then, but I think we are getting close to the stage where a lot of that if you will old backlog has been has come in and now we are into more steady state business.
Howard Chen - Credit Suisse
Right thanks. And then with the announced changes in the comp policies, are there any changes to the lock-up schedules for the [MD] Partners or Wasserstein family stake and can you just refresh us for all those stand now?
So, let me just comment on both topics. On the lock-ups and the MDs for the original IPO stock, nothing has changed. As you know there is a event on May 10th, that is the third [trudge] and then with regard to the Wasserstein Trust, you should probably direct your questions directly to them on this, but it's a trust and they are going to always act as a trust.
Howard Chen - Credit Suisse
And then just a follow-up on that first part of the question Ken, I think given just the comp policy shifts, you anticipate any change in the pace of [MD] sales.
I am not sure to be honest I think that you have to look at every individual MDs there are two factors there one obviously we'd love for our MDs to hold our stock for ever that is something that is literally a benefit to the firm and aligning interest and everything else. But there are some changes in the outside world which we just don’t control, one of which is taxes and my guess is given the noise about taxes going up, people are just going to probably take advantage of a lower tax environment to get some liquidity on things which if they sell in the future is going to be potentially much higher tax rate so that wouldn’t surprise me.
That said I just have to believe that in this environment and where we are positioned today I certainly feel this way being a large shareholder and I suspect many and most of my other partners feel this way as well is that Lazard already is better positioned now than ever and if you think about in those terms its probably better time on the stock than ever. But I think you should into partners each independent partner, individual partners can be driven by personal concerns and use of the future and taxes and things like that.
Howard Chen - Credit Suisse
Okay that all make sense I just wanted to make sure there wasn’t anything specific dependent this shift in comp policy that would kind of drive that in your mind so that’s really helpful
Anything I think it gives people a little bit more confidence about the future.
Howard Chen - Credit Suisse
Okay and then just finally Ken taking a step back on the competitive landscape you noted this market share the firm has taken through the financial crisis but also if I can get a sense of how you are seeing the balance sheet intensity of the advisory business evolving as we continue to more normalize a bit here.
Look you tell me what the regulatory outcomes is going to be in Washington and in Europe and I’ll tell you what the impact on all that’s going to be look I think from a client's perspective which is really at the end of the day what drives our business there is no question that the independent financial advisory model and independent financial advise is more valued today than and anytime certainly than in the last cycle. And I just don’t think even what we have gone through over the last couple of years that cycle to change all that much.
And I think the constraints on risk that are likely to come out of Washington and out of Europe are going to put some constraints around the ability of these larger firms to use capital as muscle in getting these advisor relationships, but it's too early to tell, but that would be my guess.
And our next question comes from David Trone with Macquarie. Go ahead sir.
David Trone - Macquarie
Couple of questions on the severance side the staff reductions if I can just follow-up on that. Was that roughly split between bankers and asset management?
No, the focus of this was on the financial advisory side of the business.
David Trone - Macquarie
Okay. And then you mentioned the upgrade dynamic are those folks largely already there that have been on the positive side of that equation or is this more perspective folks you might hire in 2010?
I think it’s a little bit of function of both. And we hired, we made some significant hires in 2009. So I think your observation is quite astute. But we'll continue where we see opportunity to hire great bankers' at a senior level to do it.
David Trone - Macquarie
Okay. And then on the change in deferral, you went from the 60% plus last year to now back to more normal 37%. And may be that’s not as relevant to the point that I actually want to touch on. Have you seen since the (inaudible) guys have gone a lot of deferrals here recently have you seen an increase in the income costs and could this change have been a reaction to that.
First of all again I'd say, what I would like to say this is offence, not defense, I mean we see a real opportunity in doing this to strengthen our competitiveness and such going forward. I really don’t know specifically what’s going on at the large firms. The level of disclosure, the comments and such its kind of early days and I just not sure what’s happened in terms of all their compensation policies, but yes we have gotten incoming phone calls, yes, there does appear to be some consternation about in the market, but frankly speaking that’s been going on for the better part of the year now.
David Trone - Macquarie
Right. Okay and then last question, your alliance with LCM do you think it will, will it stay that way or is there a chance at some point you bring that in house and try to expand it out to a full fledged equities business.
Okay two things one I am not going to speculate about our future relationship with LCM other than to say that we are very happy with the business alliance as is structured today. Both entities I think are thriving at the moment as a result of that relationship. I think in the public company, the value to us of being able to have a [key] stream associated with this capital structure advisory business and its not the only [key] stream associated with it. It is important and it's attractive because we don’t really have to take any risk. And not that the equity business as you know is a particularly risky business, it's structured correctly but this is a nice arrangement for now. I think we are both benefiting from it and we kind of like it.
And we have a question from James Mitchell with Buckingham Research
James Mitchell - Buckingham Research
Just may be chat about your strategy in the asset management business, you want to grow it. Obviously you are going to [stop] heavy in respect with equities versus 16 coming alternatives, how should we think about that going forward. Is it more organic, whatever is you are focusing on or is there acquisition also in the mix?
Look never say never to anything. Acquisitions when done on ways to create value are always attractive, buts its just making sure that you can come up with a transaction that creates value, so where we see an opportunity to buy something and it creates value for our shareholders. I think we'll look closely at it, but we've done a pretty good job of growing this business organically over the last cycle and through this trough and we are going to count, that’s the first way we are going to do it I mean we have done it organically we are going to continue to do it organically and we will be opportunistic and eventually strategic when we see things that add value if we can add them, but I am not going to count on it.
James Mitchell - Buckingham Research
Where are you focusing most in terms of growth? Is it still equities or is it elsewhere?
I would say that look we have a very strong track record in our fixed income business and so obviously we'd like to take advantage of that and continue to build that out. We've had good performance in some of our alternatives and the same thing and then broadening the equity platform is also important. We are going to do this selectively, carefully, profitably but we are going to continue to do it.
James Mitchell - Buckingham Research
And Mike may be a follow-up question on the comp side, when you were kind of running through the math were you talking about, obviously you have that base case based on current, assuming all of being equal, but as revenues grow were you seeing incremental comp ratio about 50% on incremental revenue growth?
I wasn’t trying to give an indication of what we would be doing, again we are in a hypothetical, if we got to grow comps at lower level than revenue, obviously there has got to be some number and I was just using an assumption of well if you just did a math based upon 50% ratio for incremental, and that’s 50% of notional, representing a notional comp. Where that might lead you and what you might think about in terms of, what revenue level might you have to get to, to be at that original IPO probably…
James Mitchell - Buckingham Research
Right. But you think, that is that purely hypothetical or is that something you think is a reasonable kind of target on incremental revenue?
Look, this is Ken, let me kind of try to address this. We get it clearly, we've understand it, to drive shareholder value in these businesses, you have got to drive down the compensation ratio and to do that, you have got to grow your comp at a slower rate than revenues. We get it, we know what’s expected of us from the market to get the kind of valuation not only that we perhaps have, but the one that we want. We are going to, try to be a disciplined as we possibly can to do this.
But I also can't really predict exactly what's going to happen in the outside world with regard to the evolution of revenues and importantly what the competitive environment is like with regard to pay and things like that and both of those in some respect, somewhat affect our ability to do this. But I can tell you that if we go up in revenues and the competitive environments for paying things like that which I expect will be pretty rational going forward. It may not be this year because of the anomalies of this year, but I think just given the nature of what's going on from a regulatory standpoint in the public, I think we've got a real good ability to drive down these comp ratios very significantly.
And that was our final question. And this concludes today's teleconference. Thank you for your time and participation. You may now disconnect your lines, and we hope you have a wonderful day.
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