Evercore Inc (EVR) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Evercore Third Quarter and 9 Months Financial Results Conference Call. During today's presentation, all parties will be in listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference call is being recorded today, Thursday, October 26, 2017.

I would now like to turn the conference call over to your host, Evercore's Chief Financial Officer, Bob Walsh. Please go ahead.

Thank you. Good morning and thank you for joining us today for Evercore's Third Quarter and 9 Months 2017 Financial Results Conference Call. I'm Bob Walsh, Evercore's Chief Financial Officer. Joining me on the call today are John Weinberg, our Executive Chairman, who is here with me in New York; and Ralph Schlosstein, our President and Chief Executive Officer, who is traveling. After our prepared remarks, we will open the call for questions.

Earlier today, we issued a press release announcing Evercore's third quarter 2017 financial results. The company's discussion of our results today is complementary to that press release, which is available on our website at evercore.com. This conference call is being webcast live on the Investor Relations section of the website and an archive of it will be available for 30 days beginning approximately 1 hour after the conclusion of this call.

I want to point out that during the course of this conference call, we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. These factors include, but are not limited to those discussed in Evercore'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. I want to remind you that the company assumes no duty to update any forward-looking statements.

In our presentation today, unless otherwise indicated, we will be discussing adjusted financial measures, which are non-GAAP measures that we believe are meaningful when evaluating the company's performance. For detailed disclosures on these measures and with their GAAP reconciliations, you should refer to the financial data contained within our press release, which, as previously mentioned, is posted on our website.

We continue to believe that it is important to evaluate Evercore's performance on an annual basis. As we've noted previously, our results for any particular quarter are influenced by the timing of transaction closings.

I'll now turn the call over to Ralph.

Thank you, Bob. And as Bob indicated, John and Bob are in New York, I'm in Riyadh, so if we sound slightly uncoordinated, that's the reason.

Once again, we are pleased with our third quarter and year-to-date results. We achieved record revenues for our third quarter and for the first 9 months. Adjusted earnings per share for the quarter matched last year's record and were a record for the year-to-date period. As we noted in our earnings release this morning, this is our 5th consecutive year of period year-over-year growth in adjusted earnings per share for the 9-month period.

Our results continue to be driven by the steady execution of our strategy, investing in and developing world-class talent as we expand our coverage of clients and broaden the services that we provide to those clients all in businesses in which we have a competitive advantage. We anticipate that 2017 will be another strong recruiting year, adding 6 to 7 senior managing directors in advisory and 3 in our equities business.

Our operating metrics remain strong. In advisory, we continue to be the #1 ranked independent M&A advisor in the U.S. league tables for announced transactions on a year-to-date and on a trailing 12-month basis, and the # 2 advisor among independent firms in the global league tables on a trailing 12-month basis. And our market share has grown materially in the past year.

In equities, Evercore ISI was recognized by institutional investor as the top independent research firm in the U.S. and we ranked #3 among all firms on an unweighted basis and #2 on a weighted basis. We also had the second highest number of II #1 ranked analyst, a testament to our commitment to both differentiated research and excellent client service, and a competitive imperative as this marketplace continues to involve.

In Investment Management, we've remained focused on building our wealth management businesses, ending the quarter with $9 billion of assets under management. We also completed the previously announced sale of our Institutional Trust and Independent Fiduciary business in mid-October.

Our strong results enable us to sustain our track record of significant capital return to our shareholders. Our board of directors increased our quarterly dividend by 18% to $0.40 a share per quarter, the 10th successive year of growth in our annual dividend. And our board approved an increase in the share repurchase authorization to a total of $750 million. These authorizations will allow us to sustain our commitment to offsetting any potential dilution from annual bonus awards and investments in new hires, while increasing the amount of earnings returned in the form of dividends.

Let me now briefly recap our firm-wide financial results. The third quarter net revenues were $402.9 million, a record for the third quarter. Earnings per share was $1.22, in line with the third quarter of last year as both adjusted net income and share count declined by 2% in comparison with the prior year. Year-to-date, we achieved record revenues and adjusted net income of $1.2 billion and $198.4 million, respectively. Year-to-date adjusted earnings per share were $3.90, an increase of over 35 -- 35% over the same period last year. These results principally reflect strong earnings from our Investment Banking business and a decrease in the reported effective tax rate.

Our compensation ratio remained at 59% for the quarter and the first 9 months, reflecting both the higher level of recruiting for the year, both in terms of seniority and numbers and the elimination of the contractual compensation ratio in the equities business. Third quarter non-compensation costs were $61.7 million or 15.3% of revenues as we continue to maintain cost discipline. Operating margins for the third quarter and the first 9 months were 25.7% and 25.2%, respectively.

Let me now turn the call over to John to discuss the current advisory market environment and our Advisory business. John?

Thank you, Ralph, and I will spend just a minute on the market environment, which remains broadly favorable. Clients continue to actively pursue M&A transactions in the first 9 months of 2017 driven by multiple catalysts ranging from strategic consolidation to activism. We are seeing year-over-year growth in both the dollar volume and the number of announced transactions with notable growth in transactions that range from the $1 billion to $5 billion size.

We are encouraged by the pickup in activity in Europe and the increase in sponsor activity. Credit markets remained broadly accommodative, allowing borrowers to extend maturities and M&A transactions to be financed. U.S. equity issuance increased 7% in the first 9 months relative to the prior year. U.S. equity trading volumes continue to decline in the first 9 months of 2017. This trend, coupled with reduced research budgets and regulatory changes, scheduled for the first quarter of next year are creating headwinds in the sell side marketplace.

Looking ahead, we remain constructive about the M&A landscape and believe that the core elements which drives healthy levels of M&A volume remain in place, namely, low interest rates, high equity prices, available credit, a growing economy and strong business confidence. Our teams are active and our backlogs remain strong.

Now let me spend a minute on our Investment Banking results. Our Investment Banking business had a record third quarter and first 9 months. Net revenues were $382.8 million for the quarter, a 5% increase over the same period last year. Year-to-date, net revenues were $1.1 billion, a 19% increase over the same period last year. The operating contribution was $97.4 million for the third quarter, down slightly versus the same period last year, and $278.3 million year-to-date, an 18% increase. Our operating margin exceeded 25% in the quarter and year-to-date. For the quarter, advisory revenues of $324.8 million, are up 8% year-over-year. Year-to-date advisory revenues were $922.9 million, 27% higher than a year ago. The composition of advisory revenues for the quarter reflected strong contribution from multiple sectors and capabilities, including healthy activity in our capital advisory business.

For ECM, we remained active with underwriting revenues of $11 million for the quarter. Year-to-date revenues were $30.2 million, up from $24.5 million a year ago. In restructuring, we continue to be active in energy and across several other industries, including transportation and retail. Productivity of our Senior Advisory Director -- Managing Directors was $17 million globally for the 12 months ended September 30, 2017, a 28% improvement from the $13 million for the 12 months ended September 30, 2016. As Ralph noted, we've announced 5 new Senior -- Advisory Senior Managing Directors recruits in the year-to-date and if possible, we will add 1 to 2 more before the year is complete. And we are also excited to have recently welcomed our largest class of new analysts to our firm. We ended the quarter with 86 Advisory Senior Managing Directors.

Let me now turn the call back to Ralph to address the equities and investment management businesses.

Thanks, John. Evercore ISI contributed net revenues of $49.6 million in the quarter, including $4.6 million attributable to underwriting. Year- to-date, the business contributed net revenues of $162.2 million, including $14.1 million attributable to underwriting. As John noted earlier, the environment for equities remains challenging with headwinds posed by weak volumes, lower volatility and continuing declines in the clients' research budgets. MiFID II has been a catalyst of change causing many of our clients to reevaluate how they use and pay for research. We are at active dialog with them to assure that we will continue to deliver advice and service that add significant value and warrants appropriate compensation.

As we approach year-end, we believe that it is likely that the effect of MiFID II will be to reduce the research spend of our clients, not just in Europe but globally. And that the research spend will increasingly be paid to clients with the highest quality providers -- products. We remain confident that the best strategy to address these market changes is to deliver the highest quality, differentiated research, market commentary and investment analysis to our clients. This requires a team of A+ players. The recent II survey confirms that we have a very strong team on the field, and we are very pleased to have added to that team this year announcing the addition of Mike Paliotta to be the CEO of the equity business starting November 2 as well as the addition of two very talented senior research analysts as Senior Managing Directors.

Let me now talk briefly about our Investment Management business. Investment Management reported net revenues and operating income of $20 million and $6.2 million, respectively, for the quarter. For the year-to-date period, net revenues were $54.2 million and operating income was $14 million. The year-to-date operating margin was 25.8%. These results predominantly reflect the contributions from our Wealth Management business in the United States and the money market Investment Management business in Mexico.

Assets under management from consolidated businesses increased to $9 billion in the third quarter, an increase of 3% from June 30, 2017. And of course in mid-October, as I said earlier, we completed the sale of our Independent Trust and Fiduciary business. As we have said consistently, our focus in investment management continues to be on building our Wealth Management business and on enhancing our Money Management business in Mexico.

Bob will now provide further comments on our GAAP results as well as our non-compensation costs and several other financial matters. Bob?

Thank you, Ralph. Beginning with our GAAP results, net revenues on a GAAP basis of $406.6 million and $1.2 billion, were a record for the third quarter and 9-month period, just as they were a record on an adjusted basis. Net income attributable to Evercore Inc. and earnings per share on a GAAP basis were $45.9 million and $1.04 for the quarter and $144.9 million and $3.23 for the 9-month period, a record for the 9-month period.

Consistent with prior periods, our adjusted results for the quarter exclude certain items that are directly related to our acquisitions and dispositions, including costs related to our equities business. As in prior quarters, we adjusted for costs associated with the vesting of LP Units and interest granted in conjunction with the ISI acquisition. For the quarter, we expensed $4.8 million related to the Class E LP Units.

In July, our board approved the exchange of all of the outstanding Class H LP Interests into 1. 9 million Class J LP Units, which vest based on the completion of service through February 15, 2020. During the quarter, we incurred $2 million of expense related to the Class H LP Interests prior to the exchange and $2.3 million of expense for the Class J LP Units following the exchange.

As we've noted previously, we closed on the sale of the Institutional Trust and Independent Fiduciary business of ETC on October 18 for a purchase price of approximately $34 million and generated a pretax gain for accounting purposes of $8.2 million, which will be included in our fourth quarter GAAP results. Pro forma sale of this business, Investment Management revenues for the third quarter would have approximated $15 million.

Turning to non-compensation costs. Our costs for employee were $37,300 for the quarter, 2% lower sequentially and year-over-year. With regard to taxes, the adjusted tax rate for the quarter was 37% as compared to 37.9% in the prior quarter and 38.8% in the same period last year. These results are modestly impacted in the third quarter of this year by the new accounting for stock compensation awards adopted at the beginning of the year. Like many financial institutions, we have a high effective tax rate and would benefit from the proposed corporate tax reform in the U.S. The vast majority of our earnings are taxed at U.S. rates as an up-C and there were only 2 meaningful factors that could limit the magnitude of our benefit, namely it's deductibility and state and local deductions.

With regard to share count, our adjusted count for earnings per share was 49.9 million shares, lower in comparison with prior quarter driven principally by share repurchase transactions. On a GAAP basis, the share count was 44 million shares. We repurchased 3.9 million shares during the quarter -- sorry, during the first 9 months at an average cost of $74.99, more than offsetting the shares issued for year-end compensation and those granted to attract talent over the past 12 months. We did not draw on our $30 million line of credit during the third quarter and our financial -- our cash position remained strong, as it customarily does at this time of year. We hold $556 million of cash and marketable securities at the end of the quarter with current assets exceeding current liabilities of $440.7 million.

I'll now turn the call over to Ralph for final remarks.

Okay, let me conclude with a few observations. Our team has significant momentum as we enter the final months of 2017, both for finishing 2017 strongly and for beginning 2018 with good momentum. Our client dialogs are very active and the level of prospective client activity is encouraging. Although, as always, the timing of important deal announcements and closings is difficult to predict. We are achieving significant milestones as we steadily grow market share, increase productivity and expand our team of Advisory SMDs and equity research analysts.

While we have made good progress this year so far, significant opportunity still remains for us to grow our business. As we approach 2018, we will persevere in our pursuit of exceptional partners to lead our advisory services in sectors that we do not adequately cover today. And we see opportunities to broaden our coverage in Europe and other regions outside of the United States, further building and leveraging our global capabilities.

Our capital advisory teams are contributing strongly in 2017, and we see opportunity for continued investment and growth in all of these services and capabilities, equities, debt advisory and alternatives capital raising.

We certainly expect that the headwinds in the equities business will continue into 2018 as MiFID II comes into effect. Here as is the case in all of our businesses, we stay focused on delivering exceptional service to our clients. Confident that a team of A+ players can profitably grow market share in what will almost inevitably be a shrinking revenue pool. We are excited about the opportunities in all of our businesses and believe that our focus on intellectual capital and providing independent advice will continue to both resonate and be highly valued by our clients.

I will now open the line to questions. Thank you.

(Operator Instructions) Our first question comes from the line of Jim Mitchell with Buckingham Research.

Maybe just the first on sort of a bigger picture question, I think we've got a lot pushback from clients, I think when you look at the data around M&A for the industry it's been relatively flat, if not down a little bit year-to-date, but you guys continue to outperform I think what the databases say and just wanted to get a sense of you seem pretty optimistic on the outlook, do you think this is purely more Evercore-specific in market share gains, is it non-M&A that give you the most excitement? How do we think about your ability and your positive outlook in the backdrop of, sort of, still a flat environment for M&A?

Okay. Well, I think there are a couple aspects to this. One, if you look so far for the most part, the independent firms have -- with a couple of exceptions have reported up advisory revenues. So there clearly is a market share -- continued market share move from the larger firms, integrated firms to the independent firms and among the independent firms, we are benefiting disproportionately from that and that shows up in the -- not only in the revenue statistics, but in the league tables where, as I mentioned earlier, our position is very prominent, first in the U.S. and second globally among all independent firms, and why I didn't highlight it among all firms, we are actually on a trailing, I think, year-to-date basis, seventh in the U.S. and 10th globally, which are the 2 highest finishes we've ever had. So among all firms, our market share in M&A activity is pretty consistently increasing. The second thing, which is probably more modest, but a positive also is that we have invested in broadening the services that we provide to our clients, whether it's equity capital markets advisory, debt advisory, raising capital for alternative, fund managers, et cetera and those have clearly not only benefited our clients, but helped us as well, not only by generating in some cases revenues specifically associated with that service, but because of the broader capabilities that we have, we're able to sustain sole advisory positions completely or for a longer period of time. So it actually affects somewhat the share of the fee wallet that we might get even on co-advice situations. So there are a lot of things going on there, but all of them, I think, are sustainable.

I'd just add one thing to that which is philosophically, we're -- well, we clearly view M&A volume for us and what we do very important. We are very focused on increasing our breadths of relationships on an advisory basis, and I think from our perspective, we feel like we're making progress on a number of fronts in becoming more important as advisors to more companies and from our perspective, what that will do hopefully over time, is it will bring on even more assignments and so in addressing your question, I think, our perspective is we hope that we're building market share above what the market is -- above the market, but clearly our absolute focus is to make sure that we're serving clients increasingly and a large number of clients.

Okay, that's helpful. And when we think about your investments in future hires I think you mentioned some -- Ralph mentioned areas that they may not be strong, if you like to be, whether it's sectors or geographies. What would be the biggest focus for you in terms of the opportunity set, is it non-U. S. or is it other specific sectors?

John, you want to get that?

Sure. Well, we've said to you before, one of our focuses has been the consumer sector, and we continue to be focused on that and work hard on that. And as you know, we haven't announced a big hire there to date, that's certainly continuing to be something we're focusing on. We are looking at Europe and expanding our breadths and footprint in Europe, so we're looking at that. We continue to build our industrial business. You saw that we added Paul Stefanick. We are continuing to look at that, and we feel like we've got good momentum in dialogs on that also.

Our next question comes from the line of Steven Chubak from Nomura Instinet.

So wanted to start with a question on the broader equity strategy. It's a topic, it's come up on last quarter's call, it's garnered a lot of focus from investors based on some of our latest discussions, but you cited some of the headwinds relating to MiFID implementation, just general regulatory challenges, and we're seeing greater emphasis on really differentiating between platforms, both in terms of research and execution quality. And Ralph, you spoke of the fact that you won a lot of awards on the research side, the capabilities that you have there are quite strong. But I wonder whether they need to complement that with a strong execution offering is still there, and I was just hoping you could help us better understand how Evercore ISI's execution offering really fits into your longer-term strategy for that business?

Sure. And we have a very competitive sort of execution capability, which our clients use on their own without regard to our research contribution or historically and still in the U.S., they have the capacity to do this, have used as a way of paying for our extraordinary research capabilities. So we have to continue to have a very, very high quality execution capability that allows clients to say legitimately that they're getting best execution both electronically and high touch. So that will continue. On the other hand, we are not going to get into an arms race as a liquidity provider. There are plenty of large firms that can do that. We think that's a scale business, a technology business and quite honestly, a low return on equity business. And so you're not going to see us make one quarter step more in that direction.

Thanks for all the color, Ralph, it's certainly quite helpful and clarifies things with regards to the strategy quite well. Just one more question from me on...

And this is -- I would say also that we are part of -- we're an intellectual capital firm and if you talk to the leaders of major corporations and the boards of directors, there is no question that while research and investment banking are completely independent. The fact that we have both, significantly includes -- increases our visibility and importance to the most important corporate -- public companies, certainly in the U.S. and in some sectors globally. And it's interesting I had lunch with the CEO of one of our competitors recently and he basically spoke longingly of the position that we have because of that. And so it really does have a quite positive effect on the footprint of the company with some of the most important public companies in the U.S.

Understood. And just one more for me on 4Q seasonality. I know it's something where you've been reluctant to at least guide to, just the seasonal patterns within the business, but fourth quarter, we typically see strength across the industry, yourselves included, just given the expectation for faster pace of deal closings ahead of year-end. While the public data this quarter and certainly last quarter have proven to be less reliable as an indicator for future revenues, it certainly feels like the public backlogs given the downward trajectory suggests that we may not see that typical pattern. So maybe you can you just give us some insight into whether we can see that seasonal uplift in 4Q.

That's the sort of question that we never answer.

Maybe a little something, nothing?

Well, how about buffet. Except to say -- look, nothing except to say that as I said in my closing remarks, we think we're well positioned, we've got good momentum, but -- whether something lands in December or January is truly something that is impossible to predict, which is why you're getting a nothing answer. If I was in New York, I'd be less indulge in.

Our next question comes from the line of Brennan Hawken from UBS.

Coming to the impact of investments that you've spoken to the last few quarters here, can you give us any -- do you have any greater visibility? Or can you give us any grade of color on how we should think about and frame the impact of investments both in your core advisory M&A business as well as in the equities business and how that might impact results as we start to think about modeling you over the coming year or 2?

Okay. Well, as we said at the beginning of this year, we set our comp accrual at 59% as opposed to the 57.3% that we had in our final results last year. We've obviously kept that accrual at 59% for the third quarter because at this point, we don't know whether it should be any different from that for the precise reasons that I gave in the last answer -- not answer to the last question. As a general matter, the -- and the reason we did that at the beginning of the year, just to remind everyone, is that we anticipated a somewhat higher level of hiring in terms of numbers and a significantly higher level in terms of seniority, that's predominantly visible to you today, but not completely as John indicated. The way hires generally work is the economic or the comp cost of them is roughly equal in the stub year that they get hired and in the first full year. The way the revenue part of that typically works is that we get very little, if any, revenue, it's the exception rather than the rule in the stub year, and we tend to have some on average 50% to 70% of full year -- full up and running production in someone's first full year with the firm. So the -- I don't want to say it's a pig because it's not a pig, we're really happy and it's going to be an amazing investment, but the pig going through the snake takes 2 years as a general matter, offset by revenues, some modest uptick in revenues in that second year.

The only thing that we can't anticipate at this point is the amount in seniority of hiring that we will do next year and obviously that could be -- could affect that rather long and hopefully not too convoluted answer that I just gave you, Brennan. So that's about as good as I can do. Bob, is there anything else you could add to that?

Just to put some color on it, Ralph. The -- as people who have tracked Evercore for some time now, we look carefully at the ramp rate of our hires. It has been quite strong for the class for which we now have more than 12 months of visibility. And to tie to John's remarks, when we enter a sector where we've been underrepresented as we are beginning to win industrials, again, it takes time as Ralph mentioned, but you bring on new clients, you bring on substantive relations with those new clients if history as an indicator, it adds good results.

Yes. And just to be clear, Brennan, I've been pretty -- I've said I think the same thing for more than 8 years on this call. And that is that I believe we can run this business in 55% to 58% comp ratio. If we stopped hiring, we'd get to the lower end of that range very quickly. But we're going to continue to invest for the future and because the hires that we make add real value to our shareholders 2 years to 3 years out and what I had said in every year until this year is that we expect to make -- when I joined the firm, our comp ratio was in the mid-60s, and I said I expect to make -- we expect to make steady progress toward that range of 55% to 58%. And however, that if we get an opportunity to hire either a larger number or a number of more senior or a combination of those two in any given year that we will sacrifice that steady progress to make the investment for shareholder value 2 to 3 years out, which is why at the beginning of this year, we shared with you all of the -- we shared with all of you the fact that this would be a year in which we would be doing that. So I think we've been frighteningly consistent on this matter.

Yes, okay. All right, that's fair. One question following up on the point that Steve made on execution. Can you -- I don't know if you saw, but this is, as you see, put up in our action letter here, allowing firms to accept. We've at least got that and means global, likely there'll be some firms that apply things globally. Certainly, you indicated you're not interested in joining an arms race, but can you help us think about that if you decide you want to shift and go in different direction, you go subscription model. What kind of an expense base is tied to the execution capabilities that you've got at ISI and what kind of an opportunity could that represent if you wanted to just go research-only?

I -- none of us have that data on this call. Bob can certainly provide it to you roughly afterward. But I do want to reiterate, we have many clients including some of the most -- the largest and most discerning in the world, who trade with us because they've concluded in the circumstances in which they do trade with us that we provide best execution. So in the world, as it's constituted today, even as we anticipate how it evolves, we haven't looked hard at that. If the world evolves a lot, obviously that will be something that we will look at. But today, there is no dissatisfaction on a part of the clients that would say we're providing a less than best execution service, and it obviously provides significant added revenue, which certainly our analysis shows significantly increases -- significantly exceeds the costs today of providing those services, which is why we haven't looked seriously at it. Okay, the other thing is, Brennan, as you know as well as anyone, the clients have been rapidly evolving on this. I mean, there is one client who I personally happened to have had contact with, they told us a month ago that they were going to do one thing in Europe and another thing in the U.S., and then they decided a month later that they weren't going to do that. And so, yes, this is something -- we're very close to our clients, we talk to them all the time. And this is clearly going to be an evolving story.

Yes. And the only concern around this has changed. There's no doubt about it. Thank you.

Exactly, but we do not have our head in the sands about it, I assure you of that.

I didn't assume that was the case. Thanks for all the color.

Our next question comes from the line of Mike Needham from Bank of America.

I was hoping on, you guys touched on Europe getting a little bit better. I'm just wondering, where in Europe are you seeing things improve? Is it leading to like actual active mandates in your pipeline? And do you think Europe is going to be meaningfully bigger part of your business in the coming years?

Well, the -- our business in Europe is a Pan-European business. But in terms of the concentration of it, in terms of where our talent is and our revenues, it's probably a little bit more U.K. based than certainly our two largest independent firm competitors. And that's not to say we don't do lots of business in Germany and Switzerland and France and Italy and Spain, but as a share of our revenues in Europe compared to our two largest competitors in the independent world, it's lower. So that's a clear opportunity for us. I would also say if you look our -- the proportion of our revenues, as John indicated in his -- an answer to one of the other questions early on, our revenues from Europe generally are -- as a percentage of our total advisory revenues, are also lower than our two largest independent firm competitors, who by the way both have their birth in Europe rather than the U.S. So it's not terribly surprising. But clearly, if you asked me in the next 3 years our revenues in Europe, on a percentage basis likely to grow faster than our revenues in the U.S., assuming we can find the talent and keep in mind we're a firm that if we can't find an A+ or an A, we wait. But assuming we can find the talent, I would expect that you would see a bit more growth out of Europe than the U.S. because of investments we'll make there and also I do think there is a little bit more of a pickup going forward because keep in mind one of the ingredients of a healthy M&A environment is economic growth. And Europe is like the U.S. and it's now finally starting to kick in a little bit more.

I think, I would just add a little more color to what Ralph said, which is that our Europe, we -- Ralph and I clearly understand that a major opportunity for us is Europe. And so we're going to be partnering with our European leaders to really be looking at how do we grow that business, and we'll be spending more of our time with them thinking about that business and growing it. In terms of mandates and where we stand, we feel good about our business there. They continue to actually bring in some very good things that are meaningful. So we anticipate that as Ralph said, as the market continues to recover, more will come our way. And we clearly have some very good people out there now working really hard. So we feel good about that business, but clearly it's going to be a point of focus for us.

Okay, got it. And for financial sponsors, they've become a much bigger client over time, I think for everybody. It doesn't look like that's stopping, given the amount of capital that's getting raised. Do you want to beef up with bankers dedicated to financial sponsors? Is that something you feel like you need to do? Or are you set up well as is to take advantage of the trend?

John, do you want to get that or...

Sure, go ahead Ralph.

No. I just said you go ahead. I'll add to your comments this time.

Okay, sure. We obviously recognize financial sponsors as a very important source of activity, and we have some truly excellent clients who are financial sponsors. As you probably know, we have very, very strong coverage efforts along industry sectors with financial sponsors, and we have, I'd say, very, very intimate set source of contacts and have a good sense for their portfolios. Having said that, you're absolutely right that there continues to be capital raised in those sectors, and we're not blind to that. And so we're thinking all the time about whether we are putting the right resources against those opportunities, and I would say it shouldn't be surprising that over time we will add more focus and resources to that. But right now, we feel pretty good about the fact that we have very good relationships, and we're doing a very good share of business.

Yes. If you actually look at the number of transactions in our revenues from financial sponsors versus other independent firms, we're actually doing quite a bit better than others and we've done that, as John said, by having industry bankers who are deeply involved with and embedded with their industry counterparts in the private equity firms. And the real question is, would we -- how much more business, if any, would we do if we had a -- not only an industry-to-industry coverage effort, but also some generalist effort in some number of places and that's a topic of much discussion internally and it's one that we're going to test some different approaches to see if, in fact, we can enhance what is already an industry-leading practice.

Our next question comes from the line of Devin Ryan from JMP Securities.

So I guess maybe first one here just on the capital structure advisory opportunity, I know that it's something that the firm's been focused on, and I think it's growing opportunity, but maybe some of your peers are a little bit larger there. And so I just want to maybe get a sense of how you guys think about the size of that addressable market, how big of a market is it and then where Evercore is relative to the potential there?

Okay. Well, first of all, it's certainly not as large as the M&A market. So it's smallish relative to that, but probably growing more rapidly. And when I say that, I'm talking about the circumstances in which clients pay us specifically for that service, and that's -- it's still relatively small compared to our M&A advisory business and restructuring advisory business. And keep in mind, I'm keeping aside from that the alternatives capital raising and secondary which is still not huge compared to M&A, but is bigger than sort of ECM advisory and debt advisory. The second point though, which is really important, Devin, is that having those capabilities, and I would include in that a really deep tax capability, allows us to sustain a position of sole advisor or a lead advisor for a much longer time or throughout the transaction compared to what we could have done 3 or 4 years ago. And so at the end of the year, we tally up, okay, and if you look at all of the M&A events or fee events that we were involved in, what proportion of those had some input from ECM advisory or debt advisory. And the answer is more than 50% of our fees have contribution typically from both of those. Now that might be an hour or 2 hours or it might be, in some cases, as we had recently 7 trips to the rating agencies with the client. But in a circumstance like that, in the old -- in the Evercore of 4 years ago, we would have been hired by the client to do the strategic work, we would have gotten to the point where they said, okay, we need X billion dollars of debt financing and a second advisor would have been brought-in long before the transaction would have been launched and there probably would have been something akin to a 50:50 sharing of the advisory fees. In this particular circumstance, the second advisor was brought in 10 days to 2 weeks before the deal was launched to provide the financing, and their fee was de minimis compared to ours. So -- and that wouldn't show up in capital markets advisory, but it's a great example of how that allows us to sustain a trusted advisory relationship without a co-advisor for a much longer period of time.

Okay, it's fair. This is great color. So it's really helpful. But I guess the follow-up question here would be on just capital allocation and some of the announcements that the large step-up in the buyback authorization nearly a 70% increase in the authorization size, the trajectory is directional with earnings and kind of that maybe the positive outlook. But does that reflect a view on the value of the shares? Or is it playing catch up at all around capital allocation to the buyback? I'm just trying to think about how that level was derived because we initially saw it and said that's a pretty big number.

Well, I think the answer is we prefer to go to our board once every 2 or 3 years on something like this, rather than every 6 months or a year, it's that, that simple. I think our capital allocation policies have been pretty consistent for the last 5 or 6 years. Number one, we tend to return 100% or so of our cash earnings, which tend to be higher than our adjusted earnings. We do that through a combination of dividends and share repurchases. I think the dividend increase -- historically, we've been increasing the dividend annually, the board has, by 10% to 12%. The board voted for an 18% increase this time because our earnings have been growing obviously quite a bit faster than 10% to 12% and our payout ratio had drifted below 30%, whereas historically, we've been in the 35%-plus range. And so the way I look at it is, the board has basically provided sufficient authorization for a couple plus years of share repurchases. They also increased the dividend more than we have over the last few years to perhaps balance a little bit more the return of capital between dividends and share repurchases. And I would say that it says absolutely nothing about the value of the shares, and in the half our discussion we had about this topic and the board that topic never came up.

There appears to be no questions at this time. I would now like to turn the call over to Ralph Schlosstein for any closing remarks.

No, I -- we just -- we've a lot of work to do to produce what all of you hope and expect in the fourth quarter. So we'll get back to work. And I guess I would just pick one other point, Devin, and if you look back historically, maybe it's just luck, but we've been pretty decent at purchasing shares below where we've issued them for comp and hopefully that continues. Okay. All right, thanks everybody.

This concludes today's Evercore Third Quarter and 9 Months 2017 Financial Results Conference Call. You may now disconnect.