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Lazard (NYSE:LAZ)

Q2 2011 Earnings Call

July 28, 2011 10:00 am ET

Executives

Matthieu Bucaille - Chief Financial Officer, Member of Senior Management Team and Deputy Chief Executive Officer of Lazard Freres Banque -Paris

Judi Mackey - Spokeswoman

Kenneth Jacobs - Chairman and Chief Executive Officer

Analysts

James Mitchell - Buckingham Research Group, Inc.

Guy Moszkowski - BofA Merrill Lynch

Douglas Sipkin - Ticonderoga Securities LLC

Howard Chen - Crédit Suisse AG

Christoph Kotowski - Oppenheimer & Co. Inc.

Daniel Harris - Goldman Sachs Group Inc.

Devin Ryan - Sandler O'Neill + Partners, L.P.

Operator

Good morning, and welcome to Lazard's Second Quarter and Half Year 2011 Earnings Conference Call. This call is being recorded. [Operator Instructions] At this time, I will turn the call over to Ms. Judi Frost Mackey, Lazard's Director of Global Communications. Please go ahead, ma'am.

Judi Mackey

Good morning, and thank you for joining our conference call to review Lazard's results for the second quarter and first half of 2011. Hosting the call today are Lazard's Chairman and Chief Executive Officer, Ken Jacobs; and Chief Financial Officer, Matthieu Bucaille. A replay of this call will be available on our website, beginning today after 1:00 p.m.

Today's call may contain forward-looking statements. These statements are based on our current expectations about future events and 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 certain non-GAAP financial measures. A description of these non-GAAP financial measures and their reconciliation to the comparable GAAP measures are contained in our earnings 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 in our Investor presentation, both of which are posted on our website at www.lazard.com. Ken and Matthieu 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.

Kenneth Jacobs

Thank you for joining us this morning. Our strong first half performance, including record revenues, underscores the power of Lazard's advice-driven, intellectual capital model. During this uneven economic recovery, companies, government bodies and investors continue to demand independent advice with a geographic perspective, deep understanding of capital structure, informed research, and knowledge of global economic conditions. Let me highlight a few points about our Financial Advisory and Asset Management businesses.

In Financial Advisory, we continue to build our M&A and Strategic Advisory pipeline, and to work on the most visible and complex advisory assignments in both the developed and the developing markets. We rank among the top firms globally in financial advisory revenues over the past 12 months. Demand for our Capital Markets advisory business is increasing. Our team is advising on many of the leading equity capital structure transactions in the market today. Lazard's Restructuring business remains the clear worldwide leader. As the cycle shifts, restructuring clients are now turning to us for M&A and balance sheet advice. We continue to be retained on important government and sovereign assignments, particularly in Europe. Our global Asset Management business is diversified by client domicile, region and investment strategy. Asset Management reported record management fees and record assets under management for the second quarter and the first half of the year. Our Asset Management business continues to be awarded new mandates across a broad spectrum of investment strategies around the globe. We continue to expand our investment platforms for the future.

Our Asset Management business remains focused on successfully providing superior local and global investment solutions and diversified strategies to our clients worldwide; Matthieu Bucaille will speak about those results in more detail. Over the past 6 months, we have made progress on our capital management through increases in the dividend, share buybacks and repurchasing debt. We continue to invest strategically, in both our Financial Advisory and Asset Management businesses through select hires and initiatives to grow the franchise and serve our clients worldwide. In Financial Advisory, we made senior hires in Europe, the U.S., China and South America, and in verticals, such as financial institutions, sovereign advisory, structured credit advisory, equity capital markets , and in Lazard Middle Market.

In Asset Management, we have continued to invest in our global equities and fixed-income platforms. Our strategy is simple and powerful. We compete on equal footing with firms many times our size, without undertaking the inherent risks and conflicts associated with capital. Our scale allows us to compete successfully against our largest competitors worldwide. All in all, we believe we are well positioned as we enter the second half of the year. Matthieu will now comment in more detail on our results and will highlight some of our work for clients. Thank you.

Matthieu Bucaille

Thank you, Ken. We are pleased with our second quarter and first half 2011 results. This morning, we reported operating revenue of $492 million for the second quarter and $949 million for the first half of 2011, a 12% and 6% increase over their respective periods in 2010. Net income grew to $65.8 million, on a fully exchange basis for the quarter. Earnings per diluted share were $0.48 for the quarter of 2011, an increase of 23% compared to $0.39 per share for the second quarter of 2010.

In Financial Advisory, we reported 21% growth in M&A, Strategic and Capital Markets Advisory for the second quarter of 2011, an 18% growth for the first half. Our bankers continue to advise clients worldwide on complex global M&A and other strategic transactions, many of which are mentioned in our press release. Our M&A and Strategic Advisory pipeline continues to build gradually. Among the recently announced transactions, I would like to highlight: Medco Health Solutions' $29 billion merger with Express Scripts; Progress Energy's $26 billion merger with Duke Energy; Nortel Networks' $4.5 billion sale of its patent portfolio to a consortium of international technology companies.

In Capital Markets and Other Advisory, our operating revenue increased primarily, because of the higher value of fund closings by our Private Fund Advisory Group, and because of an increase in underwriting fee from public offerings. We continue to work on important sovereign advisory assignments: including advising the government of Greece on its voluntary bond exchange and debt buyback; the U.S. Treasury, with respect to the full exit of its TARP investment in the Chrysler group.

In Restructuring, our second quarter operating revenue decreased 39% compared to last year, due to the continuing decline in the number and value of corporate defaults, since the peak in early 2009. The sequential increase in restructuring operating revenue, in the first quarter to the second quarter of 2011, was due to higher success fees on several completed assignments. We expect Restructuring revenue to continue its cyclical decline, but it may be lumpy on a quarterly basis.

As Ken mentioned, our Asset Management business reported outstanding results, attaining records in many respects. Asset Management operating revenue for the second quarter, increased 27% to a record $238 million compared to the second quarter of 2010. This represents a 6% sequential increase from the first quarter to the second quarter of 2011. In the first half of 2011, Asset Management operating revenues increased to a record $462 million. Our Asset Management business, now represents approximately 49% of our total operating revenue. Management fees drove the increase in Asset Management revenue. Our Management fees grew 32% to $221 million for the second quarter, and increased 30% to $428 million for the first half, achieving record highs of both periods. Assets Under Management also reached a new record level of $162 billion at June 30, 2011. We had modest net outflows of $300 million for the quarter. For the first half of 2011, net inflows were a positive $400 million. This lower level of inflow resulted from the closing of some of our larger investment strategies last year and from the general market environment characterizing the second quarter of 2011, by concerns over the state of global economy. While we remained focused on growing our revenue, and as Ken mentioned, investing in our businesses for the future, we're also focused on maintaining cost discipline and managing our capital.

Earlier last year, we stated our goal to grow annual compensation expense at a slower rate than revenues. We continue to be focused on that goal. While operating revenue increased 6% for the first half of 2011, compensation expenses increased 3%, compared to the same 2010 period. Our compensation ratio was 58.1% for the second quarter and 58.5% for the first half of 2011. In the first half of 2010, this ratio was 60%. The ratio of non-compensation expenses to operating revenue was 20.2% for the second quarter of 2011, compared to 19.8% for the 2010 second quarter. This increase is due to investment in our businesses and a higher level of business activities.

Finally, I would like to highlight a few initiatives regarding the management of our capital. First, during the first half of 2011, we repurchased approximately 3.2 million shares of our common stock and exchangeable interests. At June 30, this already represents a substantial part of our RSU dilution for the year. Second, on July 22, we entered into an agreement with Intesa, to repurchase the totality of its subordinated convertible notes. The purchase price of $131.8 million plus accrued interest was an attractive discount to its $150 million face value. This initiative allows us to reduce our financial debt and at the same time, the cash on our balance sheet. Third, the quarterly dividend of $0.16 per share, which we declared yesterday, will increase last April by 28%. In the current and sometimes unstable environment, our financial position remains strong and our investment strategies are conservative. At June 30, we had over $1 billion in high-quality liquid assets.

In conclusion, our simple business model is well positioned as the need for independent strategic advice and superior investment solutions continues to increase. We will remain focused on revenue growth, cost discipline, capital management and investment in both of our businesses for the future. This conclude our remarks. We are now happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first question from Devin Ryan with Sandler O'Neill.

Devin Ryan - Sandler O'Neill + Partners, L.P.

Historically, M&A cycles have always had higher troughs and higher peaks. And we're still running at levels, for M&A, that are well below what was experienced during really strong periods of the last cycle. So, when you guys think about how this cycle seems to be developing and maybe the potential for M&A activity. Does it currently appear to you that the historical trend of higher peaks will remain intact and is your view consistent across geographies?

Kenneth Jacobs

Okay. Let me take a shot at this. Really since '09 we've been pretty consistent in our views on this cycle, which are that this is going to be an economic recovery, a little bit different from your typical recovery from a recession. It's kind of uneven, I think that's been proven out over the last couple of years. It's generally forward moving, but it's had some stops and starts. So you when you think about M&A, we think of 3 things that drive M&A: confidence, financing, valuation. Financing, valuation, all the technical factors around that are positive. Financing's inexpensive, companies are very flush with cash. Private equity firms are flush with cash again. Valuations appear reasonable, at least when you look at them relative to the economic prospects, they still appear reasonable, and so, the technical factors underlying a strong M&A environment are there. In addition, because of the kind of slower than expected or slower than usual economic growth, the ability to get organic growth in your market is tough, so the need to acquire companies is greater, the desire to acquire companies is greater. You do that in your home market, you get cost savings and maybe some incremental growth. You do it in your home market to get new positions in emerging markets, we've seen quite a bit of that. And you go to the emerging markets directly, and we've even seen flows from the emerging markets into the developed markets. All of that is underway. The factor which has inhibited, we believe the typical kind of recovery you see in M&A environment is CEO confidence or general optimism. And that's been impacted by the shocks, the mini shocks, some cases occasionally, major shocks that take place -- and that have taken place in the developed world. In Europe, it's all around the Euro crisis. In the U.S., it may be self-inflicted, but it's around the budget crisis. And so, consequently these kinds of things have a way of interrupting confidence, which I think -- we think have tended to dampen a little bit the M&A cycle and make it a little bit different from what we've seen in the past. But as these things become sorted out, which over time they should, then all the factors that underlie a strong M&A environment are in place. Moreover, if you look at the regulatory environment, generally speaking, its improved, at least in the United States over the last couple of years, in some of the key industries like energy and healthcare. Financial services is still a little bit uncertain. And if you go sector-by-sector, generally speaking, the factors I described earlier with the exception of confidence are all in place.

Devin Ryan - Sandler O'Neill + Partners, L.P.

Okay. Thanks for all that detail. And in addition within Asset Management, obviously, some modest outflows. And you guys have mentioned that some of the flow ins that drove the strong flows, I think in the last couple of years are at capacity. So can you just talk a little bit about your outlook for flows, currently, conversations you're having with firms to put capital into Lazard. That's a management division and then if there's any products that you expect will pick up some of the slack, that's been created?

Kenneth Jacobs

Sure. I mean we've start -- look, we've consistently been investing in new product strategies for quite some time. And I think you can see we've had a fair amount of success with that over the last half a dozen years or so. And we continue to do so, and we expect we will have success with many of these new products over the coming years. It's across of a range of activities in the emerging markets and emerging markets debts fund, emerging markets growth fund. We've made investments, such as the REIT fund and there are a number of other strategies that we ceded or have brought to market. So we're pretty confident that over the course, of the next several years, we'll going to benefit a lot from these new strategies. With regard to the existing strategies, we've had a soft close on 2 of our largest funds, which we've been very open about for the better part of, I guess, over the course of the last year. That's had some impact on flows in, but the larger impact is really just the overall macroeconomic environment, which is, in some respects, delayed some of the decision making at big institutions, and also, probably impacted the decision perhaps to go a little bit more towards cash than equities, which has been reflected, I think, in the market over the last couple of months or so. And again, much like the M&A market, as things start to sort themselves out in Europe and the U.S., macroeconomically, we expect we'll be well positioned to benefit from that.

Operator

The next question comes from Daniel Harris with Goldman Sachs.

Daniel Harris - Goldman Sachs Group Inc.

Staying in the Asset Management business here for a minute. Obviously, the performance has been very good from a financial perspective and one thing I noticed this quarter was that the average fee rate in the asset ticked up, looks like somewhere around 2 basis points, I was wondering is that more of a mix shift and should that be consistent going forward?

Kenneth Jacobs

Matthieu, want to take that?

Matthieu Bucaille

Yes, the answer is the impact of a mix shift, we have more of a higher earning fee from 2 strategies, and I think this is the answer to your question. Going forward, it very much depends upon the nature of inflows that we will have.

Daniel Harris - Goldman Sachs Group Inc.

Okay. Thanks very much for that. And then, on the flows that we're seeing, obviously, a little bit of an outflow here. What you guys have talked about in the past is sometimes the timing of flows doesn't necessarily match up with the winning of mandates. So I was just wondering, can you give us a little sense of how the backlog for 1 mandate stacks up maybe from what we saw a couple months ago or a year ago and how you think that, that looks going forward?

Matthieu Bucaille

Well, we don't comment on our backlog in our pipeline. I think as Ken said, there's been a little bit of a softer environment recently and people delaying decisions. Nevertheless, we have -- also have said, invested over the last few years in a number of new strategies and new growth engines and as the business environment improves we think we should be able to also have successes and inflows in those new products.

Daniel Harris - Goldman Sachs Group Inc.

Okay, thanks for that. And then lastly, for me. Can you talk a little bit about the pipeline building gradually in M&A? Obviously, the CEO confidence is being distracted by some of the bigger issues in the U.S. and Europe. If we saw some resolution in the U.S. and gradual resolution in Europe, I mean, do you think it's as quick as, once we're passed that, the other factors that drive M&A as you mentioned sort of overtake everything, and we see a nice surge? Or do you think it's a steady increase thereafter?

Kenneth Jacobs

Look, I think -- the thing about M&A is it tends to be somewhat episodic even in good times, that is, you get a slew of deals happening, some copycat deals, you get a lull, and you'd get a bit more. I expect if things clear in the U.S., you can see a surge of activity, but what I'd bet on is that -- I'd have a hard time predicting, which week, which month, but I think that if things clear, the overall economic environment improves a bit. I think you could see a pickup, you'll see a continued increase in activity for all the factors I laid out before.

Operator

Next question comes from Howard Chen with Credit Suisse.

Howard Chen - Crédit Suisse AG

Just one more in the Asset Management flows. I know, Ashish is always mindful to note, that net inflows don't paint the entire picture. So could you just give a flavor for how gross versus gross inflows and outflows have been pacing?

Matthieu Bucaille

I think the answer to this question is that the level of -- we still have a very large level of inflows. We continue to have roughly the same level of outflows, I think just as mentioned before, with the closing of some of our strategy, the absolute level of inflows is somewhat reduced versus previous period, so on a net inflow basis, as what you've seen, reduced net inflows.

Howard Chen - Crédit Suisse AG

Okay, thanks, Matthieu. And then you mentioned investment spending a few times in the remarks and the release, I guess on the non-comp expenses this quarter, is there a way to separate what's a function of higher expenses? Just for the fact that you're doing more business. Everyone's traveling more and how much of it is more medium to longer-term investment spending to some of the things that you noted?

Matthieu Bucaille

So if you look at this evolution of our non-comp expenses, I think you have several factors. The first one is as we are growing our Asset Management business, we're growing Asset Management expenses associated with this business. There are fees that are directly related to the level of activity in Asset Management. Such as fees paid to third-parties, such as the outsourcing fees, which are directly related to the level of our Assets Under Management. Second, as you know, we also are a global business, with a cost based in Europe, so there has been also some foreign -- negative foreign exchange impact for us, on that line. Third, the overall level of business activity has picked up, so yes, there is more travel expense and marketing expenses, business development expenses and that is frankly, the bulk of it. We also have said, had been invested in a few areas in the future and that also explains part of the increase in the non-comp expenses.

Howard Chen - Crédit Suisse AG

Okay, great. So just to summarize Matthieu, you would say the more business activity picking up related expenses are a majority of kind of what we're seeing as an increase?

Matthieu Bucaille

Yes, that's exactly it.

Howard Chen - Crédit Suisse AG

Okay, great. Thanks for clarifying that. And then finally for me, Ken, on the hiring environment. Could you just discuss and update us what you think the bid for talent is like out there? How much less competitive is it out there given the bigger dealers are going through a more challenging time on the secondary side and comp changes have -- comp plans have changed a lot since we last got the update on you on this. Thanks.

Kenneth Jacobs

Okay. So generally the environment, it's probably as attractive environment as we've seen in a long time for hiring, we probably are seeing more quality people, and the actual cost of actually hiring people is probably more reasonable than it's been in a while. It's not cheap per se, but I think the sort of what I would describe as value for the people we're getting is probably better than its been in a longtime. The issues at the larger firms, which are apparent from a lot of the results over the past couple of weeks or so, are all around having to kind of reinvent their business models and that causes a fair amount of dislocation and that, combined with some of the compensation practice changes at the end of last year with regard to the increased -- substantially increase in deferrals and some of the clawbacks have made for a relatively good environment for us in terms of hiring people. And as I've said in the past, we're very selective about this, we will hire, we have -- the wonderful thing about Lazard is we have a fully built out platform, so for us, we can be very thoughtful about this, and we can do it in ways which are really incremental to the business, and I think that's what we're doing.

Operator

Next question comes from Chris Kotowski with Oppenheimer.

Christoph Kotowski - Oppenheimer & Co. Inc.

I found Ken's discussion of the 3 factors: confidence, financing and valuation interesting. I wonder if you could dive into that a little bit more, in particular, as it relates to Europe because you have a big business there obviously. And I guess what I'm wondering about is, it's been a pretty prolonged period of stress and I'm wondering whether that is -- whether there are any signs that, that is beginning to take its toll on both financial performance and financing ability. And then, I guess I'm wondering also in particular, as it relates to some of the stressed peripheral markets, like Spain and Italy, does it set the stage for a bunch of inbound M&A activity? I mean, do you find a lot of kind of distressed companies there, now looking for buyers? And how do you position yourself to take advantage of that, if that happens?

Kenneth Jacobs

Well, look. Let me start with just our positioning in Europe. We have a wonderful business in Europe, with I think, the strongest advisory team out there, really across-the-board, and I think we are scaled to the market at the moment, and that could be at levels now and could easily accommodate more activity levels should they increase. What's nice about our business is a good balance between traditional M&A, strategic advice, as well as a very, very deep set of skills in complicated financial advice, associated with balance sheet restructuring, financial institution balance sheets and sovereign advisory. So if you look at the kinds of transactions or assignments we've been involved in over the course of this year, I think it very much reflects what's going in the market there. We've obviously, had our share our successes on the M&A side, the Vivendi-Vodafone transaction is an example, yet at the same time, we've also had quite a few successes on some of the more important and difficult issues related to the macroeconomic situation in Europe. We've worked on several very notable equity advisory assignments, most recently the Bankia assignment in Spain. We've also, as you probably noted, are working with the government of Greece and many other things, which I can't speak about here, which are underway now. So I think we're positioned well for the environment that exists in Europe for the foreseeable future. With regard to activity levels, look it's going to be -- again, it's been a little tougher in Europe in terms of the recovery than the U.S. obviously, but there has been activity. The private equity environment has improved probably this year over last year. Secondary sales, that is sales between private equity firms, is up. We've participated in quite a few in the second quarter of this year. And you've seen a fair amount of outbound activity or cross-border activity in Europe. That probably continues over time, you really have some of the leading multinationals in the world across Europe and they remain active. And one of the real questions, which probably doesn't get resolved until you have some clearer resolution, macroeconomically in Europe, is the activity that happens within countries in Europe, particularly in some of the more sensitive sectors like financial institutions and the like.

Operator

Next question comes from Guy Moszkowski with Bank of America Merrill Lynch.

Guy Moszkowski - BofA Merrill Lynch

I was wondering, in the restructuring area, you mentioned the lumpiness, whether there were any 1 or 2 transactions, which completed, which maybe significantly drove the improvement there?

Matthieu Bucaille

Yes. I think that's exactly why the Restructuring business is as we all know in a typical decline and this trend will continue from one quarter to another. The lumpiness and this lumpiness is because due to lower level of activity if you have 2 or 3 big successes then that can create a little bit of a variation from one quarter to another.

Guy Moszkowski - BofA Merrill Lynch

So, it was probably that a couple of things completed, you had the sort of completion success fees rather than just an ongoing level of revenue, sort of regular mandate kind of revenue building?

Matthieu Bucaille

Exactly. I mean, that's if you compare Q2 to Q1, we've had more of success even.

Guy Moszkowski - BofA Merrill Lynch

Got it. Last year, on the M&A side, it was pretty clear that you had a fair amount of back-end loading of the M&A completed fee revenue in the second half. Based on what you said about backlog, and what we've seen announced in the publicly available sources, it would seem like you're probably headed in that direction again this year, would that be fair to expect?

Kenneth Jacobs

Without getting into predictions about second half. What I'd say is, look, we've got -- we've obviously built pipeline over the course of the year. If the year -- as long as we don't have any upsets in the market, I think what you see from the public documents is probably reflective of how the year will go. It's hard to do more than that without giving you a projection.

Matthieu Bucaille

Second quarter are always typically stronger for us than -- second half, I'm sorry, are always typically stronger because the Asset Management we have been sensitive and because the fourth quarter in Financial Advisory is also always stronger.

Guy Moszkowski - BofA Merrill Lynch

Yes, it stands to reason that, that seasonality would hold. Let me just turn to a couple of questions on the financial management issues that you talked about. First of all, just with respect to the subordinated convertible that you bought back from Intesa. Can you give us a sense for what the interest savings would look like going forward?

Matthieu Bucaille

Okay. The interest savings -- this debt was paying 3.25% interest coupon on $150 million, so it's almost $5 million savings of interest expense on a yearly basis.

Guy Moszkowski - BofA Merrill Lynch

Got it. And was there any -- I guess you did the transaction this month, so was there any charge or financial impact one way or the other from the actual completion of the transaction in the third quarter other than the accrued interest and then the lack of interest going forward?

Matthieu Bucaille

Okay. So there was -- just to be clear, there was absolutely no impact on the second quarter. This is a transaction that was closed in the third quarter, on July 22. In the third quarter, what are we going to have? We're going to have an impact, which is going to be a gain, linked to the fact that we're purchasing these shares at roughly $18.2 million gain, number one. Number two, we will have interest savings. They are going to start as of July 22; and third, because of the conversion option which expired as of June 30, you would have a reduced level of fully diluted number of shares, which is going to be offset by some increases, we have always increased RSU amortization and other factors.

Guy Moszkowski - BofA Merrill Lynch

Right. And then of course, you also still have a fairly significant share buyback authorization available to you?

Matthieu Bucaille

Absolutely.

Guy Moszkowski - BofA Merrill Lynch

And just in terms of the timing in the second quarter of the impact of the RSUs that, as I think you mentioned went up. The timing there was that those vested fully right at the end of the first quarter, so you had a full quarter impact there, but the share buyback presumably was more ratably kind of over the quarter, so should we expect more of the impact of the share repurchase in the second quarter to be visible in the share count in the third quarter?

Matthieu Bucaille

Yes on both thoughts. You're exactly right.

Operator

Our next question comes from Douglas Sipkin with Ticonderoga.

Douglas Sipkin - Ticonderoga Securities LLC

Most of my questions have been asked and answered, but I figured I'd just chime in on the Asset Management side. I know you still have about 6 months left in the year. But any color around how performance fees are shaping up -- I know seasonally they're stronger in the second half of the year obviously, the market is probably not as robust. So maybe if you could put a little parameters around that, that would be helpful.

Matthieu Bucaille

Performance fees have been down versus last year because the market has been flat to have the performance fees. And the second comment is that, we had a couple of very strong incentive fees last year, which didn't repeat in this year, so that also explain the evolution of our incentive fees in our results and the last comment is that as you know, most of our incentive fees are in the alternative investments activities and that most of them are being paid in the fourth quarter.

Douglas Sipkin - Ticonderoga Securities LLC

I guess so then -- how is the alternative performance shaping up this year through the first 6 months?

Matthieu Bucaille

Well, these fees are really -- the benchmark of these fees is going to be the performance as of the end of the fourth quarter. So I can't right now predict anything.

Operator

Our next question comes from Jim Mitchell the Buckingham Research.

James Mitchell - Buckingham Research Group, Inc.

Just a question on the comp ratio, if we are thinking -- not that we can predict this, but if we do assume that we do see a seasonal uptick in the revenues in the second half of the year, can we continue to see that comp ratio trend towards your target of 57.5%? Or can we not really say at this point?

Kenneth Jacobs

Well, look, so far all that comp is, is an accrual. Comp is actually set at year end. And so it's really based on what our revenues are at year end, and what our compensation practices are at year end, and I think we give you guys a pretty good and very clear picture of how we think about compensation, both in terms of mix and in terms of vesting and the like. We've been very consistent to the extent that we increase revenues, we will grow compensation at a slower rate than revenue growth. And that will apply this year as it did last year, and we'll continue to apply next year and as far as we can see. So we should make progress, we should continue to make progress on this count this year.

Operator

That does concludes today's conference. Thank you for joining today's Lazard conference call.

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