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00:00Last time we had talked in March, you were a little bit more cautious on M&A markets.
00:03Maybe it's time to put the pom-poms away.
00:06Since then, in the first quarter, it was a record first quarter.
00:09The M&A taps were wide open.
00:11So what gives?
00:12How did we end up having such a strong start to the year despite all of the headline risk?
00:18Well, everyone counts the data a little bit differently.
00:20The way we look at it, sort of fundamental M&A, it's up maybe 5%, 10% off of a
00:25year ago.
00:26You get into all sorts of issues about whether or not do you count data center investment,
00:31what's the annualized run rate versus year on year.
00:34But the way we look at it, we think the market's up about 10%.
00:37And if you rewind the tape, that's where we had been at the end of last year,
00:41where we said there are long-term fundamental changes in the way in which the economy works.
00:47Companies, whether they're private asset managers or strategics, need to react.
00:53There's going to be a continued level of activity.
00:55But let's not forget, 2025 was a pretty high bar.
00:58And off of those levels, trees don't grow to the sky, maybe up 10%, up 15%.
01:03So in that sense, I think we're pretty much on track for what we thought.
01:07But when we met last time, I think since then, everything is higher.
01:11So earnings are higher.
01:13Share prices are higher.
01:15Energy prices are higher.
01:17Inflation expectations are higher.
01:19Interest rates are higher.
01:20But the one thing that isn't higher is conviction.
01:23And I think until there's greater conviction about the direction in terms of the resolution of these geopolitical risks and
01:33some of these debates about AI and not just winners, but also losers, until there is greater conviction, I don't
01:41think you see a step function change to higher levels.
01:44So we're at healthy levels.
01:46We're just not at accelerating levels.
01:48What is the risk that the conviction is the other way, that it's a conviction that AI is disrupting too
01:52much, that energy prices are too high?
01:54Could that be the direction from here?
01:56Well, at some point, you need the markets to reflect that consensus.
02:01And as I said last time, once you get to that new equilibrium, and that's the baseline, and that's the
02:07way in which people can get comfortable transacting off of that equilibrium share price, then I think you move higher.
02:14So it's going to be bumpy.
02:15And one of the things we've talked about is we live in an increasingly volatile world.
02:20The news flow goes from bad to good and back and forth, oftentimes, you know, in a matter of moments.
02:25And until some of that volatility comes out of the system, it's hard to really see it.
02:31So there's no doubt that some of those shocks could lead us to a pause.
02:34But at the end of the day, all of these disruptive forces, changes in energy prices, access to supply, those
02:42are going to require companies to reimagine their supply chains, to change their investment focus.
02:47And that means you're either selling or you're buying or you're doing something.
02:52You're not standing still.
02:53So it's all long-term good.
02:54Even so, sponsored-backed dealmaking hasn't come back in the same way.
02:58Private equity deals, they were still down quarter-over-quarter, year-over-year in the first quarter.
03:02What does it take to get them back?
03:04Well, it's a complex problem because so much capital was deployed and so much of it was deployed at the
03:12peak of the market in 2021 at record valuations, near zero interest rates.
03:20And since then, a lot of the evolution of those portfolio companies has not gone precisely according to plan.
03:28And I think for a lot of these alternative asset managers, you need to time the exit.
03:32One of the things that private equity is exquisite about is timing exits.
03:37And if it weren't for the need to return capital, they've taken the view that the right way to maximize
03:43value is to extend the runway and to play this out for a little bit longer.
03:47The challenge has been that while they're doing that, there's an imbalance between the capital that's been called and the
03:54capital that's been invested and returned.
03:58And that's what's causing a lot of pressure on these alts folks.
04:02But I don't see a fundamental change in the activity levels until there's a sense that these portfolio companies have
04:12gotten to their optimal harvesting period.
04:14And right now, having bought a lot of these assets in 2021, today is really not the optimal harvesting period.
04:22I mean, you could make the argument that they just haven't marked their assets to reality and you might not
04:26get to that period.
04:27Well, there's certainly that point of view.
04:31The reality is also that a lot of these assets are disproportionately invested in industries and companies that are vulnerable
04:39to AI disruption as opposed to investing in opportunities that are capitalizing on AI disruption.
04:47So you have a little bit of the fact that too much money put in at the less than optimal
04:53time.
04:54The portfolio of assets was invested in situations that are not, with the benefit of hindsight, the best.
05:01But there still are opportunities to manage your way out of this.
05:05And I think that's where the LPs have given their capital and their decision-making to the GPs.
05:10And the decision, more often than not, has been, let's play this out a little bit longer.
05:15I wonder how private credit fears come into this.
05:16I know in your latest earnings call you said we don't see systemic issues.
05:19We do think that this is undoubtedly slowing the pace and potentially cause a retreat in retail flows.
05:25How does that affect the overall ecosystem?
05:27Look, I think first and foremost, I think it's an issue for what's the pace of asset gathering.
05:34And so much has been made of accessing retail channels and finding more product that can go into retail channels.
05:41Private credit, when you talk about best of both worlds, having the ability to have attractive investment returns at the
05:50same time, you can get liquidity back most of the time.
05:53I think that best of both worlds is the case 90% of the time.
05:57In an environment like this, best of both worlds becomes worst of both worlds, where you've promised liquidity.
06:04And retail investors don't hear beyond that.
06:06It's liquidity subject to.
06:09They don't hear the subject to.
06:10And right now, you've got a public relations challenge more than anything else.
06:14So my view is that retail clearly is going to stop fueling the growth in AUM for private credit.
06:23There's an increasing realization it's an institutional product, not a retail product.
06:27There will be nicks and bruises and losses along the way.
06:31Some of it's reserved for it.
06:33Maybe not all of it.
06:34Underwriting standards are tightening up.
06:36There's more focus on comparing private credit versus the syndicated market, which is creating perhaps a better sense as to
06:46where and when are the right opportunities for private credit.
06:50All of that being the case, we don't see it as a systemic issue.
06:54By the way, are you starting to see deals more increasingly being funded by syndicated, broadly syndicated markets?
06:59Has there been a pullback in use of private credit?
07:01There's certainly been a shift, and the balance is a little bit more towards syndicated.
07:06But we've always believed that issuers need to test both markets.
07:11And being able to consider the benefits and opportunities of the syndicated market versus the private credit market, that's more
07:19choice.
07:20That's more opportunity.
07:22And we're uniquely positioned to represent issuers and decide which way to access capital, whether it's in the private market
07:30or the syndicated market.
07:31But if you ask me what the trend has been over the last six months, it's moved the pendulum more
07:36towards the syndicated market.
07:37Whenever you have a credit cycle of sorts, and we can discuss whether or not we're going through that, but
07:42various issues in the market have brought forth more regulation, whether it be the S&L crisis, whether it be
07:46the GFC.
07:47Could that be the direction that we're headed at the moment, where there is more regulation around things like credit
07:53because of the fears over retail exposure?
07:55There certainly is an increasing awareness that when you deal with retail investors, the level of protection needs to be
08:04amplified.
08:04Now, in an environment where regulation writ large is viewed as an impediment to growth, that sometimes loses out in
08:14that push-pull, less regulation protecting retail investor.
08:19My sense is that that's really going to come to the fore if and only if there are real painful
08:25losses that retail investors experience.
08:27And then there will be a review of regulation.
08:31But inevitably, I've been around so long, I know that the pendulum just moves from side to side.
08:36Right now, we're in a de-rag mindset.
08:39But at some point, if there's real harm to retail, that's when you get the political machinery focusing and protecting
08:49the individual.
08:51I mean, is it fair to say that this industry just made a mistake in marketing these things as semi
08:55-liquid?
08:55I don't know if it was a mistake.
08:58It's just that there are the words.
09:00And the words, as articulated, were precisely what the private credit was.
09:08But that's not the way they were heard.
09:10So to me, it's simply a marketing challenge in an environment that resulted from an unanticipated change in values and
09:22desires for liquidity from retail.
09:25And I suspect that the lesson will be that retail is a wonderful channel, but you really need to treat
09:31it with kid gloves when you try and tap that market.
09:34Because at the end of the day, it's a different level of sophistication.
09:39They're very vocal.
09:40And you need to make sure that at all times you're thinking not just, you know, one step ahead, but
09:46sort of what if, what if, what if.
09:48And we're in one of those situations where some of those what ifs are causing some real uncomfortable situations.
09:55Okay.
09:56So a lot of this did start just in software exposure.
09:58And it feels like the risks around software, while not the best understood because we don't know where the world
10:02is going, they certainly have gotten attention.
10:04Do you, are there any outstanding risks that you think overall this market is annoying, ignoring rather?
10:11I'm amazed at how often we look at what the conventional forecast is, you know, what the consensus is, without
10:19looking at the tail risks.
10:20My own view is we're living in a world where, you know, every day there's an interconnected, you know, domino
10:28somewhere that's falling, that's creating an unanticipated outcome.
10:32Most of the time it's in an outcome set that can be easily managed.
10:37But the more complex the world becomes and the more shocks to the system, whether it's geopolitical, technological, political, the
10:46more that that happens, the more the risk of a tail result.
10:50And I just have a general sense that while I fundamentally agree with a consensus call or the expected view
10:58of where the economy is going, the tail risks of severe outcomes continue to rise.
11:05And the market, in my opinion, isn't really pricing that tail risk.
11:10And if you end up in one of those tail results, then you're in a whole different place.
11:14How do you, as a business leader of, you know, of manager of many people at PJT Partners, think about
11:21that, specifically the tail risk of AI and how fast it's growing and how disruptive it could be for your
11:26business itself?
11:27How do you prepare for those those types of tail risks?
11:30It's a it's a real challenge because the first impulse is to do something and to move with great speed
11:37and great rapidity because the world is changing and you need to be on top of it.
11:41At the same time, early on in the evolution of this industry and this magical transformation, the risk is that
11:51you end up making decisions early on that very quickly prove to be the wrong decision.
11:57So it's how do you change the culture and change the mindset before you change the technology?
12:03And what we're spending a lot of time on is trying to get our senior partners to be the power
12:09users, to learn to really use this technology.
12:14We'll figure out ultimately what are the data sources, who's going to be the provider of our engines, what's going
12:23to be the fully built out backbone, what are all of the cyber security protections?
12:28All of that comes. But you have to start culturally that this technology is your friend and it's not a
12:35threat, because if you just if you just run from it, then you never evolve the the organization.
12:42So it's a it's a real challenge.
12:44Just on that note, when you saw the mythos news, did you pick up the phone, call Anthropic and say,
12:48hey, can we get our hands on this thing?
12:50Well, I certainly thought that I didn't think they were going to return my phone call.
12:53So I didn't make the phone call in that regard. But I certainly said I wouldn't mind having this.
12:58That seems like a big threat, though, that kind of technology in the wrong hands.
13:01There's there's all sorts of unanticipated outcomes from all of this.
13:06And the pace of technological evolution is morphing into a revolution.
13:12And the question is, can government and regulation and policy keep up?
13:18And that's what makes it super challenging. That's at the macro level.
13:22At the micro level, as a business manager, you're trying to make sure that you don't make decisions early on
13:28just because you want to be doing something.
13:31You want to be on the forefront and then find out that you have the white elephant.
13:34Right. So you've got to build this not just for the next 10 weeks.
13:38You've got to build this for the next 10 years.
13:40You've got to build the mindset first.
13:43And that's where we're spending time on.
13:44And that's why last point, Danny, we don't spend a lot of time talking about what this is going to
13:50do to headcount.
13:52What we want to do is we want to become more productive.
13:55We want to do more with what we have.
13:57We don't want to do the same with less.
14:00Just just I want to end on a lighter note, because this does feel like existential kind of thing.
14:03You've been asked to run the NBA expansion process.
14:06How's that going?
14:07Well, it's a it's a tremendous honor to to work with the NBA.
14:12I had the opportunity to work with David Stern when he was the commissioner to set the expansion values back
14:19in the early 90s in Vancouver and Toronto.
14:22And the NBA has always been such a forward thinking league that back in the early 90s, they were the
14:28first league to say, let's just not pick a number from the air.
14:33Let's actually do some financial analysis.
14:35Let's look at the long term implications.
14:38And they brought a level of sophistication and acumen that really has set the standard.
14:44So it's a great privilege.
14:45It's a lot of fun.
14:46And we're hoping to to be the partner of the NBA through this process and for years to come.
14:52Do you think the buyers will look quite different for Las Vegas and Seattle now that we have the existence
14:56of private equity and interested in this industry?
14:59I think the the NBA has so many has so many tailwinds.
15:33It's it's such a global sport.
15:34And for for this product, you have no names of buyers for us.
15:37Yeah.
15:37Got it.
15:38Got it.
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