Evercore Inc (EVR) 2022 Q4 法說會逐字稿

Good day, and welcome to the Evercore Fourth Quarter and Full Year 2022 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Evercore management and the question-and-answer session. (Operator Instructions)

I will now turn the call over to Katy Haber, Managing Director of Investor Relations and ESG at Evercore. Ma'am, please begin.

Thank you, Kelsey. Good morning, and thank you for joining us today for Evercore's Fourth Quarter and Full Year 2022 Financial Results Conference Call. I'm Katy Haber, Evercore's Head of Investor Relations and ESG. Joining me on the call today is John Weinberg, our Chairman and CEO; and Celeste Mellet, our CFO. After our prepared remarks, we will open up the call for questions.

Earlier today, we issued a press release announcing Evercore's fourth quarter and full year 2022 financial results. Our discussion of our results today is complementary to the press release, which is available on our website at evercore.com. This conference call is being webcast live in the For Investors section of our website, and an archive of it will be available for 30 days, beginning approximately 1 hour after the conclusion of this call.

During the course of this conference call, we may make a number of forward-looking statements. Any forward-looking statements that we make 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 SEC, 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 the GAAP reconciliations, you should refer to the financial data contained within our press release, which is posted on our website.

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

I will now turn the call over to John.

Thank you, Katy, and good morning, everyone. 2022 was undoubtedly a complex and challenging environment. Yet through all of the volatility and macro head -- driven headwinds, Evercore was able to serve our clients and strategically invest in our business. We continued to perform well both in the quarter and for the full year. In fact, 2022 was our second best year on record for the firm with $2.8 billion in revenue, $529 million in net income and $12.01 in earnings per share.

For the full year and fourth quarter, we also made further progress on our goal of narrowing the gap between Evercore and the top 3 bulge bracket firms in terms of advisory fees. 2022 also marked a year of investment for Evercore as we continue to execute on our long-term growth strategy. We promoted and hired A+ talent in our important strategic target areas that will drive long-term value for the firm, including 7 Advisory Senior Managing Directors and 1 Senior Adviser in 2022.

We also continued to build out important product capabilities and diversify our business to connect with our clients more deeply. As we've discussed previously, our revenues today are meaningfully more diverse than they have been historically. In each of the past 4 years, including 2022, our non-M&A businesses accounted for at least 1/3 of our revenue. The diversification of our business stems from the scale we've built across many capabilities, including restructuring, private capital advisory and fundraising, private capital markets, capital markets advice and execution, equity sales and trading and Wealth Management.

Additionally, we've managed our balance sheet to create the capacity to invest in our franchise through cycles. We will continue to execute on our long-term strategy by investing in targeted areas of growth and in areas where we see opportunities having the highest impact.

Before I begin recapping the year, I'd like to quickly touch on our recent CFO announcement. Last quarter, we announced that Celeste will be leaving Evercore. This is Celeste's final quarter with us. And while we are sad to see her go, we feel fortunate to have worked with her and value the contribution she's made to the firm.

As you may have seen, we are excited to share that Tim LaLonde will become our CFO effective March 6. Over the last 22 years, Tim has been an integral part of Evercore's leadership, driving the firm's successful growth. He brings a deep knowledge of Evercore of the role and is highly respected as a partner with a superior record of delivering operational excellence. We look forward to his contributions as CFO and are confident that he will position the firm for sustainable, long-term value creation.

With that, in a similar fashion to a year ago, I want to provide a more detailed view of the past year and again, outline our plans for the future. Starting with global advisory, our teams remain very active and constant -- with constant strategic dialogue and execution with clients. Looking at our market activity more broadly, global amounts M&A activity was down 36% compared to record levels in 2021. However, M&A volumes in 2022 were generally in line with historical averages.

For Evercore specifically, the number of announced global transactions was down only 9% in 2022 compared to declines of about 40% for our bulge bracket peers and 25% for our independent peers. While advising on large M&A transactions globally is very much core to what we do, a meaningful portion of our business down from deals less than $5 billion in transaction value. Over the last year, we saw an increase in clients seeking advice on a highly complex and unique situations, including public to private deals, which reached record levels in 2022. As for sectors, tech continued to be active as well as health care and industrials. We also saw strength in traditional energy, renewables and infrastructure.

Next, from a geographic perspective, our team in Europe had a very strong year, representative of investments we've been making in the region over the last several years. Our European Advisory business had its best year in Evercore's history. We saw strength across the energy, financials and utilities and infrastructure sectors as well as debt advisory.

We continue to focus on efforts and expansion in the region and around the globe. To that end, 2 of our 2022 SMD hires that I mentioned earlier were international. Within global advisory, we continue to be active in other areas outside of traditional M&A. First, our strategic defense and shareholder advisory team remains very active in 2022 as the number of campaigns, particularly in the U.S., was on par with 2021 levels.

The trend of targeting large-cap companies continues, representing almost 30% of activist campaigns in 2022 from the prior year. Evercore has advised companies representing over $1.5 trillion in market value in this space, and we have the largest team of dedicated Activist Defense professionals on Wall Street.

Turning to restructuring. The business won a significant increase in assignments over the past 12 months, and we are entering 2023 with a robust pipeline of opportunities. The growth in the business reflects a mix of company and creditor assignments ranging from bankruptcies and out-of-court settlements to liability management and distressed financing.

While default rates are still relatively low, rising rates and corporate margin pressure should present significant additional opportunities for our restructuring team. We are well positioned for this upcoming cycle, and our restructuring team continues to collaborate with industry bankers to provide our clients with the most comprehensive advice.

Next, our market-leading businesses focused on private capital, which include fundraising, buying and selling of LP and GP stakes, continuation funds as well as our real estate capital team. 2022 represented the second best year on record for these businesses in aggregate. Collaboration across these teams and the sponsor M&A and industry teams has driven synergies and will continue to be a great platform for growth.

We've also continued to build out our private capital markets team, which advises and executes on privately placed equity and debt financings as well as complex balance sheet and capital structure issues. The Underwriting business had a challenging year with industry issuance down 80%, resulting in the lowest year of issuance since the great financial crisis.

While broad industry trends impacted our business, we outperformed on a relative basis and continued to gain share -- and will continue to once activity returns in the second half of the year. While the IPO market was quiet, Evercore participated in 1/3 of all U.S. IPOs greater than $50 million and in 4 of 5 largest U.S. IPOs in 2022. Notably, our role continues to elevate as we were bookrunner on all of our equity and equity-linked Underwriting transactions in 2022.

Health care continued to be a standout sector for us, and we were involved in almost 50% of all health care Underwriting deals in 2022. Additionally, we've continued to invest in other products, such as convertibles, which continued to gain momentum and provide an additional product offering for our clients. We are pleased with the advancement of our Underwriting business and expect to see a pickup in activity when the market stabilizes.

Next, our Equities franchise continues to focus on providing our clients with the highest quality research and service as they navigate volatile and uncertain markets. Our research franchise had a noteworthy year. We were ranked #1 by institutional investor on an individual weighted basis for the first time ever and had the highest number of top 3 analysts of any firm on Wall Street.

And finally, in Wealth Management, while the broad market declines impacted our clients' portfolios and assets under management for the year, the business continued to have strong long-term performance and client retention.

Now I want to turn to our growth road map for the long term. An important pillar of our strategy is tied to the expansion and enhancement of our client base and coverage model. We have a very strong traditional M&A business, and we continue to fill areas of sector and geographic white space where there is ample room to expand.

We remain focused on investing in the fastest-growing segments of the economy, including fintech, clean tech, biotech and more traditional areas of technologies, such as software, as well as expanding our global footprint. We continue to invest in and develop our sponsor coverage efforts. We've increased focus on expanding our private client capital businesses, and believe there are incremental opportunities to serve this client base, both in this business and our sponsor M&A practice.

In addition, as we mentioned last quarter, we added several senior bankers to our U.S. financial sponsors group as we continue to invest in this important space. Overall, we see real opportunities from deepening and broadening many of our product capabilities. We're opportunistically investing selectively across our business and see strong returns from doing so. As we make these investments, we will continue to navigate the market for talent. We'll stay active and selectively recruit A+ talent while maintaining a high bar for all hires.

We begin 2023 with 7 newly promoted SMDs in our Advisory and Underwriting businesses across various sectors and capabilities as well as one in our Equities business. Cultivating the next generation of talent is core to our success, and we are excited about our pipeline of talent. Already this year, we have had an additional SMD committed to joining our Private Capital Advisory business later this quarter.

Before I turn the call over to Celeste to review our financials, I want to make a few final comments. 2023 will be another complex year, and it will be difficult to repeat the record results that we had in the first half of 2022. That said, we remain focused on our expense base, both comp and noncomp, and maintaining a durable and liquid balance sheet. There is quite a bit of discussion around the probability of a recession as we begin 2023. While some believe we will enter one, others do not. Either way, we feel we are well positioned.

We are starting off the new year with a strong backlog, although it is down from where it was a year ago, which followed the strongest year for M&A activity on record. Similar to last quarter, there remains greater risk to execution as transaction announcements continue to be slower and the timing of closings is elongated.

And while economic stability and market conditions will continue to influence deal activity, strategic dialogue with clients continues at very high levels. As we look forward, we are confident in the outlook for our business. We believe the firm is well positioned to capitalize on the current environment and the opportunity that lies ahead as markets stabilize.

With that, let me turn it over to Celeste.

Thank you, John. Before I review the financials, I want to thank John and the rest of the team as this is my final earnings call at Evercore. It has been a great pleasure to work with this team as well as our sell-side research analysts and shareholders.

For the fourth quarter of 2022, net revenues, net income and EPS on a GAAP basis, were $831 million, $140 million and $3.44, respectively. For the full year, net revenues, net income and EPS on a GAAP basis were $2.8 billion, $477 million and $11.61, respectively.

My comments from here will focus on non-GAAP metrics, which we believe are useful when evaluating our results. Our standard GAAP reporting and a reconciliation of GAAP to adjusted results can be found in our press release, which is on our website.

Fourth quarter adjusted net revenues of $837 million, declined 26% versus the fourth quarter of 2021, which was a record fourth quarter. On a full year basis, adjusted net revenues of $2.8 billion declined 16% compared to 2021's record results. Fourth quarter adjusted operating income and adjusted net income of $218 million and $152 million, decreased 53% to 55%, respectively. Adjusted earnings per share of $3.50, decreased 51% versus the fourth quarter of 2021.

For the full year, adjusted operating income and adjusted net income of $723 million and $529 million, both decreased 37%, while adjusted earnings per share of $12.01, decreased 31% versus the full year 2021. Our adjusted operating margin was 26.1% for the fourth quarter and 25.9% for the year, in line with pre-2021 historical averages.

Turning to the businesses. Fourth quarter advisory revenues of $704 million, declined 27% year-over-year. Advisory revenues were $2.4 billion for the year, a 13% decline compared to 2021 and our second best year ever for advisory. In accordance with the relevant accounting principles, our revenue includes approximately $116 million from transactions that closed in early January and/or had other conditions pending at period end. To compare, we recognized $21 million in the fourth quarter of 2021 and $32 million in the third quarter of '22 in accordance with the same accounting principles.

Fourth quarter Underwriting revenues of $44 million were down 32% compared to the fourth quarter of '21. For the full year, Underwriting revenues were $123 million, down 50% versus 2021, reflecting the decline in overall market issuance. Commissions and related revenue of $54 million in the fourth quarter were down 2% year-over-year. For the full year, Commissions and related revenue of $206 million were flat compared to 2021.

Fourth quarter adjusted asset management and administration fees of $17 million decreased 23% year-over-year, while full year revenues of $71 million decreased 9% compared to $21 million, reflecting a decline in AUM, driven by market depreciation. Fourth quarter adjusted other revenue, net, was a gain of approximately $18 million in part reflecting the increase in value of our investment funds portfolio, which is used as a hedge for our DCCP commitment, as equity markets rallied in the fourth quarter. For the full year, adjusted other revenue, net, was a loss of $9 million, as equity markets were negative for the year. Other revenue was a gain of $32 million in 2021, driven by positive equity markets.

Turning to expenses. The adjusted compensation ratio for the fourth quarter was 62.5%. Our full year reported adjusted comp ratio was 60.9% versus 55.7% for 2021. When adjusting the compensation ratio to exclude the hedge in our DCCP, the comp ratio for the full year would have been slightly lower at 60.3% compared to 56.2% in 2021 when making the same adjustments.

Fourth quarter non-compensation costs of $96 million were down 5% from a year ago, primarily driven by a decrease in other operating expenses. Last year reflected the initial charitable contribution to the newly created Evercore Foundation. This was partly offset by increases in travel, which began to resume during the fourth quarter of 2021 and increased throughout 2022.

For the full year, non-compensation cost of $365 million were up 11%, largely driven by increases in travel related to return -- to a return to more normalized levels of travel and professional services as well as increased costs due to return to office, inflationary pressures on technology and higher occupancy expenses as we added more space during 2022. As we have previously mentioned, we are focused on our expense management practices across comp and noncomp. Our headcount is down quarter-over-quarter and since June. We continue to manage our lower performance and limit incremental and replacement hires.

On the noncomp side, we are managing expenses tightly. We expect growth in noncomps in 2023, but at a significantly lower rate than what we saw in 2022. This will be driven by continued normalization and travel practices, inflationary pressures across both travel and tech as well as continued occupancy-related increases, driven by the annualization of new space and contractual rent increases. If the market environment improves and activity subsequently picks back up, we could see an increase in deal-related expenses.

Our adjusted tax rate for the quarter was 28.2%, up versus last year. The full year adjusted tax rate was 24.5%, also up versus last year. The increase for the quarter and the full year were primarily driven by an increase in state and local taxes as well as nondeductible expenses, including meals and entertainment, and stock comp expenses.

Turning to our balance sheet. As of December 31, our cash and investment securities totaled about $2.1 billion. Our excess cash as a percentage of our total cash and investment securities is in the low teens. We review our excess cash position with respect to the current business environment, and we continue to hold more cash than what is required to run the firm as market and economic uncertainty persists. We remain committed to returning all excess cash -- all excess capital not invested in the business to our shareholders over time, while maintaining a durable balance sheet.

In 2022, we returned a total of $655 million to shareholders through dividends and repurchases of 4.4 million shares at an average price of $117.27. During 2022, we more than fully offset the dilution from the RSUs that were granted as part of our annual bonus compensation process, and we expect to continue to do so in future periods.

Our fourth quarter adjusted diluted share count increased slightly to 43.5 million from 43.2 million in the third quarter of '22, primarily reflecting the increase in the share price and vesting of awards, partially offset by share repurchases. Relative to a year ago, our share count is down significantly from 47.3 million in the fourth quarter of 2021.

With that, we will now open the line for questions.

(Operator Instructions) Our first question will come from Brennan Hawken with UBS.

So the outlook commentary was a bit more limited than we're used to hearing, likely reflecting uncertainty. But one thing I'm curious about, from your perspective, what do you think a recovery might look like? Because this is something that's often debated, and I know it's a tough question to answer. But recency bias, to me, results in folks often looking at the most recent recoveries, which were aided a lot by a Fed that was quite accommodative.

And so if we end up seeing a less accommodative Central Bank, how do you think that might play through in recovery? And when you -- when we look back to prior cycles, which cycles would you think might be most apt as you sit here and plan out what a recovery might look like, obviously, depending on whether or not we land a recession or not, but generally based on what we can see today?

Thanks for the questions. And in terms of how we would chart this cycle versus other cycles, I think it's hard because this is so -- it's such a unique situation. The way we think about it is that, clearly, what is happening now is that there's a lot of standing back by strategic and by sponsors looking and saying, we're in a wait-and-see mode. And I think that is happening. We've seen that the investment grade public market has opened up on the credit side.

And I think that -- so certainly, there is a beginning to see some liquidity in the market for strategic transactions. But I think that a lot of the Boards and management teams are still standing back and waiting because there are so many exogenous things that could happen. And I think they're watching to see what happens to the Fed today and the messaging from the Fed. I think people are watching to see how inflation is behaving. And I also think people are continuing to monitor the geopolitical situation.

I think -- generally, I think that management teams and Boards would love to start working on their strategic -- their strategic dialogues and really start working on what they want to have as their growth patterns. On the sponsor side, I think that the investment -- the noninvestment-grade market, leveraged finance markets, are still somewhat restricted. And I think that people are waiting and seeing.

Clearly, private credit is out there, and it's available, but it's not big enough to really drive a huge market. And we're also watching to see whether buyers and sellers' expectations for values are coming closer together. And I think the way this will play out is that you're going to see a few transactions start to go forward. And as those go forward, people are going to be watching carefully to see what the reaction is. I could see it taking some real time to start the momentum of the recovery, and then I could see the recovery accelerating.

I do think that, that even though rates will remain relatively high from a recent -- with regard to recent history, I do think what you'll see is you'll see that, that people are going to want to start really looking at getting going on their plans. And I think that so many management teams and sponsors have been planning for this recovery and wanting to participate. I think you're going to see -- as things look more positive as some deals get done, I think you'll start to see an accelerating of the pace of transactions.

Our next question will come from James Yaro with Goldman Sachs.

John, I just wanted to ask quickly on the debt financing markets, which do seem to have reopened to some extent so far in January, and I guess in February. Maybe you could just speak to whether some of the financing pressures holding up M&A deals have subsided, and that's what we're seeing? And how this could impact the speed of an M&A recovery? And then conversely, could this have a more negative impact in terms of reducing the restructuring opportunity?

Well, first, I'll start with the latter part of your question, which is, I could easily see -- and this doesn't often happen, I could easily see the merger market really picking up and restructuring continuing at a very hot pace just because I think that in terms of restructuring, this is really a broad type of application for restructuring. It's not industry-specific. It's really company-specific. And we're seeing a lot of opportunities, both in terms of distressed financings, companies that really need advice with respect to their capital structures.

There's a real broad diversity of activity going on in our restructuring group. So I could see that moving forward even if the merger market is recovering. In terms of the credit markets, there's no question that the opening of the credit markets and the strength of the credit markets has really helped investment-grade corporates and big companies really look at the market. But really, the recovery is not really that they don't have access to being able to do deals. It's really that they are really watching the market to see when the market will be receptive to doing big deals, and then I could see that recovering.

And so I think that there's no question that the credit markets make it easier. But I think that it's really going to be management teams and Boards getting the confidence to actually move forward with sizable situations to drive their strategy. I think there is a real pent-up demand from corporate and sponsors to do deals. And so I think the minute they think that there's going to be broad acceptance to deals, you're going to see it start, and as I said, I think it's going to build.

Our next question will come from Matt Moon with KBW.

Just wanted to touch on the non-M&A advisory contribution. More recently, we've spoken to this coming in closer to kind of 1/3 of the total revenue pie over the past 3 years. But I'm curious, I guess, as to how this has trended in relation to this number over the past year kind of considering the push and pull dynamics of lower Underwriting fees, but what I would imagine is a larger contribution from the private capital advisory and restructuring side.

So wondering that shift within this [pocket], one, if the 2022 figure came back to a similar proportion to what you've disclosed over that 3-year period? And two, how we should be kind of thinking about this outlook on these non-M&A advisory revenues in 2023, particularly with what we're seeing on the M&A -- pure M&A adviser specifically?

Sure. Thank you. Well, generally, I think we're still in the 1/3 area as to where these businesses are actually coming out in terms of our total revenue. I think it's generally in the same place. These are very, very strong businesses that are, I think, well positioned. And I think that the prospects for these businesses is very good, and we're actually investing in them, whether it's in restructuring, we promoted another Senior Managing Director, who is going to be very productive. They're very busy right now. They're taking on many new assignments and they've got a lot to do.

And so I think that we feel good about that business. Private Capital Advisory were investing there, too. I mean we really think we have best-in-class businesses there. And we're trying to port on. We're giving them opportunities to grow. We're thinking it's a real strategic opportunity for us, and we think that's important. And then the other businesses like Equity Capital Markets and equity trading are actually well positioned and everybody seems to be gaining some ground in a relative sense.

So debt advisory is the same. Wealth Management, I think, is doing quite well. I think -- so I think the answer to your question is that these are good businesses, and they will drive performance. Right now, they continue to be in the 1/3 area. And I don't think that's going to change because I think that -- I think our merger opportunities will continue to grow. So I think -- right now, I think it's not changing dramatically other than I feel like we're -- we feel good about the prospects of those businesses and really how we're -- the dialogues that we're having in there.

Celeste, do you want to say anything more on that?

Yes. I mean, as John said, the merger business will remain the most important business for us as a firm. And as you pointed out, ECM will ebb and flow a strong ECM year for us, can help that number. It helps a lot of things. It provides us with a lot of operating leverage. But I think, as John mentioned, we're investing in all of our businesses. And -- but the merger business will remain the most important, but we're very happy we've invested and built the diversification over the last 10 years.

Our next question will come from Jim Mitchell with Seaport Global.

You mentioned Europe as being -- having a record year last year. It did start off strong just from the environment perspective, but I know you've been investing heavily there, too. So can you just talk a little bit about your outlook there, both from your own investment standpoint, the momentum we have as well as the environment?

Sure. The environment started out very strong at the beginning of last year, as you know. And I think a lot of our competitors, I think, felt the same thing. The environment started to basically cool off a little bit towards the latter part of the year. Our prospects are that we actually see that we are feeling good about the beginning part of this year with that business. I think we were kind of midway through or -- midway through the third quarter, we were wondering. But we feel like it's actually strengthened, and so we feel good about that business.

In terms of our investment in Europe, we continue to think that we should stay on the course that we have been, which is we are really making strategic investments there. We basically targeted certain areas that we think we can actually really build and do it productively for our shareholders. And so we're willing to continue to invest there. In fact, we are aggressively looking for opportunities in those areas to really grow. And I think we're in the middle of some very, I think, important dialogues.

So our intention is to continue to grow Europe, but do it in a way where we are really being thoughtful and careful about making sure that what we're doing there and when we're putting shareholder money to work there that it returns. And I think, right now, it's actually working quite well, and we're going to continue to be careful and diligent about how we do it.

Our next question will come from Devin Ryan with JMP Securities.

Just a bigger picture question around really the demand for advice. One thing we always look at to think about kind of the advisory market is just looking at global M&A volumes, and I think lot of people track that as kind of the proxy for what's happening. But as the market continues to evolve, it's just much more than that and all the other capabilities you bring to clients. And so let me just get a little bit of a sense of how -- John, you would just frame how the demand for advice more broadly has evolved or changed? How you go to market with clients and how that's changed? And just really also the willingness of clients to pay for other types of advice beyond just M&A capabilities.

Thank you for the question. Our philosophy is that we want to become the strategic adviser for our clients. And so when we enter a go-to client situation, what we want to do is we want to build very strong relationships with the senior decision makers, offer what we think are best-in-class capabilities and products, and really try and help them with the things that are important to them.

In the very early days of the firm, I think we were doing that, but we were also -- we were limited by having a much more -- a much smaller client product base. And we didn't have quite as many products to offer the clients. Now we have a much broader suite of products. And as a result, we can go into CEOs and CFOs and heads of M&A, and we can offer them a much broader set. And we're finding that it's really -- it's giving us real opportunity to do more for clients.

And whether that's going in and having activist advisory assignments and really beginning the relationship that way or coming in with interesting ideas for growth or whether it's looking at capital structures, we're able to do all of those things. And as a result, I think we are actually able to create more connectivity and have a much better ongoing set of dialogues that I think really help us bond with clients.

So from our standpoint, what we've invested in and what we've done is really starting to have some real impact. And I think we're really trying to broaden our reach with respect to clients. And so over time, we're investing more in more clients and building that client base. We will be successful if we're able to continue to build the client base and offer them products that they think are best-in-class and very, very importantly, to be able to put advisers in front of them who they will value at the highest level. So the answer is, I think, the model is feeling good right now.

And John, just one clarification on just their willingness to pay for types of advice beyond just something that's transactional.

Understood. We are definitely getting advisory fees. Debt advisory fees, restructuring advisory fees, we were able to really get fees. And so on the one hand, merger deal fees are really always going to be the big driver of revenue for the firm, I think, just because they -- the transaction-driven fees are actually some of the best. I really think that we're having a larger and larger base fees that are being paid for that are nontransactional and very much advisory.

So I guess the answer to your question is we're building that. And I think that the more expertise and the broader our product set is the more we're able to get that. And if we're successful, we're able to do a merger and then maybe also have debt advisory and be able to have that connectivity from different parts of the transaction where we're able to actually charge fees.

And so that's going well. We're continuing to work on that. And as much as anything, it's us learning how to really apply what we think are real capabilities to the clients and therefore, adding value that they think is worthwhile.

Our next question will come from Steven Chubak with Wolfe Research.

This is Brendan O'Brien, filling in for Steven. So I wanted to ask on the comp ratio. Given all the uncertainties surrounding the outlook and with backlogs entering the year at a weaker level this year than last, it feels like comp pressures are likely to persist into at least the first half. At the same time, it sounds like the impact of your DCCP hedge was a significant driver of the incremental comp pressures that seen this year. So I wanted to get a sense as to whether the 61% accrual levels seen this year should be a good place to start for next. And also I was hoping you could help frame how we should be thinking about incremental comp leverage from here. Your full year comp expense was down about 8% versus a 16% decline in your overall revenues. Would you expect that same dynamic to hold in 2023?

Thanks for your question. So the comp ratio will continue to be driven by revenue in this environment, and we will set the ratio and share it with you in April, and that will be based at that time, not on 1 quarter, but based on our estimate for the year at that time. So our outlook for the full year. As a reminder, our SMDs are paid by performance that makes the largest part of our comp expense. However, base benefits and other things become more meaningful in this environment.

But as you can see, we've reduced our headcount quarter-on-quarter. And since June, we're more aggressively managing at our performers. We're limiting additional headcount and replacement hirings, and we'll continue to do so as long as the environment remains weak. However, we will continue to invest in A+ talent.

And really, the comp ratio will be how all of those things come together, and we'll be really thoughtful about all of those based on what the revenue environment looks like and what we think the opportunities are for us to invest in the future of the franchise.

Just one additional comment, which is that the comp ratio is really going to be impacted most of all by revenues and revenue growth. And with respect to our backlog, our backlog is strong. And the real variable in my mind is that deals -- that backlog and our ability to realize that backlog into revenue, at this point, is really influenced by what has been an environment where it's taken longer to get deals done, and it's all been extended. And so the real question is, what I would say the realization rate of that backlog because that backlog is strong. And if we're able to start to see an acceleration of that realization rate, I actually think you'll see the revenue come -- go up, and I think you'll see us take a lot of the pressure off of the comp ratio.

Our last question will come from Manan Gosalia with Morgan Stanley.

John, you noted that dialogue with clients is still pretty active, particularly on the strategic side. So any differentiation you're seeing in terms of deal size? I know that high antitrust scrutiny is not new, but is that still weighing on large deal activity? And are you seeing more dialogue and smaller deals right now?

I think we're actually seeing really healthy across the board. Personally, I think there is something to be said that people are watching really carefully on antitrust. And I think -- I'm glad you brought that up because it is important, and it's something that we're all watching really carefully. That's not stopping management team from really looking at big things. But I think there's a really careful scrutiny with respect to how antitrust will play in those situations.

In the middle, which is often when we see recovery, we often say, well, it's going to be led from the middle or the bottom and it will accelerate. In this case, I think that the middle market and the under $5 billion deals actually are quite healthy. But I also would say, anecdotally, in what I'm seeing, and I'm talking to a lot of our bankers very regularly. I've seen that there are some really big -- some big deals that are being seriously considered and I could see them going.

So I don't think I would differentiate big from small right now. But I would say it's -- a lot of it is going to be the wait-and-see approach that we talked about earlier in this call. It's going to be really interesting to see when some transactions at different size levels start to go forward, how quickly others in those areas or those categories start to pick up. I could easily see it actually being a relatively broad-based recovery, but it's just -- it remains to be seen because, as you know, we still have so much uncertainty in this market, which is really what's holding the market back right now.

And we do have a follow-up question from Brennan Hawken with UBS.

One just sort of clarification quickly. The 130 SMDs, you noted in the release that, that includes the 1Q recruit, but does that also include the 7 advisory promotions?

Brennan -- sorry, the promotions will be reflected in the 1Q number because they're effective as of -- we just announced them, but they're effective as of March 1. So they'll be included in the 1Q number.

Okay. Excellent. And I don't know if Tim, your -- I know next quarter you will be your call, but congrats on the new role. And just a quick one to sneak in here. You've been at Evercore for over 2 decades and held many roles. So from your perspective, what do you think is most misunderstood about Evercore as far as the valuation of the company was reflected?

Brennan, I am so sorry, but Tim actually is out on a medical situation for this morning, and so he's not here for this call. He may be listening in, but I don't think he's going to be able to charge into that one. Let's put that one on hold. And in our next call, we'll make sure we remember and answer it for you.

Okay. I hope he's doing okay.

(inaudible) medical issues...

He is fine, but he couldn't be here today, unfortunately. He would have liked to...

Fair enough.

Thank you. All right. Thank you, everyone. See you next time.

Thanks, everyone.

Ladies and gentlemen, this concludes today's Evercore's Fourth Quarter 2022 Financial Results Conference Call. You may now disconnect.