Greenhill & Co Inc (GHL) 2015 Q1 法說會逐字稿

Welcome to the Greenhill and Company first-quarter 2015 earns conference call.

(Operator Instructions)

Please note this event is being recorded.

I would like to turn the conference over to Chris Grubb, Chief Financial Officer. Please go ahead.

Thank you.

Good afternoon and thank you all for joining us today for Greenhill's first-quarter 2015 financial results conference call. I am Chris Grubb, Greenhill's Chief Financial Officer, and joining me on the call is Scott Bok, our Chief Executive Officer.

Today's call may include forward-looking statements. These statements are based on our current expectations regarding future events that, by their nature, are outside the firm's control and are subject to known and unknown risks, uncertainties, and assumptions. The firm's actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the firm's future results, please see our 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.

Neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any forward-looking statements after the date on which they are made.

I would now like to turn the call over to Scott Bok.

Thank you, Chris. The first quarter was a busy and highly productive one for our firm on many fronts. We achieved significantly higher revenue and profitability compared to last year. We were involved in a substantially increased numbered of announced transactions that generally are still pending, and we announced the addition of 12 new managing directors who together enhance our capabilities across multiple regions, industry sectors, and types of advice.

Turning first to the quarterly financial results. We achieved advisory revenue of $61.9 million, a 28% increase over the first quarter of 2014. I should add here that Cogent, our acquisition which was consummated on April 1 separately had $10.4 million of unaudited first quarter revenue with is consistent with its strong revenue pace last year and reinforces our enthusiasm for that business.

Starting in the second quarter, Cogent's revenue will obviously be incorporated into ours. Turning back to our first-quarter revenue, it's fair to say that neither this quarter nor the year-ago first quarter was a particularly strong one in terms of large completed transaction revenue, but the first quarter of 2015 saw a significant improvement in terms of announcement and opinion fees relative to the first quarter of 2014. Our improved revenue outcome resulted in cost ratios far below last year's first quarter levels with our compensation ratio at 54%, the same as last year's full-year result, and our non-compensation costs and absolute dollars varied similar to last year's full-year run rate but for some one-time transaction costs related to the Cogent acquisition.

Even after those transaction costs, which had a negative impact of about 2 points of margin and $0.03 of earnings per share, we achieved a 20% pretax profit margin, an EPS of $0.25. That allowed us to again pay a strong quarterly dividend and repurchase sufficient shares to achieve a flat share count and we accomplished that while again ending the quarter with essentially no net debt.

Turning now to transaction announcement activity. We were involved in 21 transactions globally in the quarter, all of which are listed on our website. As I'm sure most of our shareholders know, we typically list on our website on a fairly prompt basis nearly every corporate transaction with which we are involved.

Fund placement transactions generally are not listed due to regulatory limitations on publicizing those prior to the final closing of a fund, and bankruptcy or restructuring advisory transactions are often listed very late given the long timetables for such transactions. But certainly the large majority of M&A advisory roles as well as most financing advisory roles are listed with the exceptions relating primarily to particular client confidentiality requirements. Putting the first quarter's 21 announced transactions in context, we only listed nine transactions in the prior quarter and 12 transactions in the year-ago first quarter, so clearly as we suggested would be the case in our last quarterly call, we are off to a stronger start to 2015 both in revenue terms and in terms of announced transaction activity.

We continue to see an unusually large share of our revenue by historic standards coming from US clients, and market statistics suggest that indeed is the reason seeing the strongest level of activity, but it is worth noting the highly diverse regional participation we saw in first quarter announcements; 8 of the 21 announced transactions involved an Australian company, 7 involved a European company, 3 involved a Japanese company, and 9 involved a North American company with one-third involving cross border advisory work and hence the double counting in those regional statistics. The regional teams we've developed are working collaboratively on meaningful cross border opportunities, taking advantage of unified global team of partners with no reliance on contractual alliances, joint ventures, or similar arrangements, as well as our collegial culture to deliver seamless and strong global advisory capabilities to our clients.

Our European-related announcements related predominately to the UK market. We still have a lot of upside potential in continental Europe as activity picks up there. As with the UK and both Australia and Japan, we are hopeful that increased announcement activity will lead to increased revenue contribution as we progress through the year. Finally, in Brazil we built an attractive list of client mandates, but getting deals to agreement and announcement is very difficult given the current economic, market, and political challenges that country is facing. In sum, we are busy everywhere. Most of our current revenue is coming from the US. Deal announcements suggest the UK, Australia, and Japan will become more significant revenue contributors, and longer term we remain hopeful for increased activity and revenue in continental Europe and Brazil.

It is also worth noting that we have been working on meaningful transactions from a size perspective. While we don't focus on lead tables, I can't help but note our strong year-to-date ranking in that popular metric. Our strategy is to focus primarily on larger transactions, not because of lead tables] but because we believe they drive higher productivity, higher profitability, and greater brand value than smaller transactions.

In the first quarter we advised nine transactions of over $1 billion, including financing advisory roles, and five of those nine were M&A transactions of over $3 billion. These larger transactions related to both the US and Europe and were originated and executed by a diverse group of managing directors.

By sector, the industrial sector was by far the most active sector for us in the first quarter, followed by the healthcare which continues to be a particularly active one both for us and for the market generally, but we are also seeing good client activity in most other sectors as well. By type of advice we continue to generate the majority of our advisory revenue from M&A transactions. Within M&A, completion fees as always were the biggest driver, but revenue from announcement and opinion fees was up meaningfully compared to a year ago. Our financing and restructuring advisory business continues to find attractive financing advisory opportunities, but the very favorable credit environment continues to constrain more traditional bankruptcy and restructuring activity.

Our capital advisory business is off to a strong start again this year with a very active real estate fund raising environment. The acquisition of Cogent should drive meaningful growth in this segment of our business, which I'll speak to in greater detail shortly.

Before I go into more detail on Cogent, let me comment briefly on the market environment for M&A activity. The market statistics for the first quarter are similar in many ways to those of 2014, although even further skewed toward larger transactions versus a broader increase in the number of total transactions. Specifically, the number of announced transactions was flat versus a year ago, while the volume of transaction announcements is up about 16% compared to the prior year, driven by meaningful percentage increases in transactions over $5 billion and over $10 billion in size.

To understand what this means, it's important to look at absolute as well as percentage changes. The overall volume statistics were driven by deals $5 billion or greater in size, but to put that in context there were only 14 more of those in this year's first quarter than last year's. Specifically, there were 31 deals of that magnitude in the first quarter versus 17 in last year's first quarter. So it continues to be a small number of deals that are driving improvement in deal volume statistics. As it relates to transaction completions, the trends are very similar with total transaction completion volume increasing 20% year-over-year driven by a small number of large transaction completions while the total number of transaction completions declined slightly further to start the year.

What does all this market data mean? Of course it's early in the year for any grand pronouncements or predictions, but we continue to feel like the M&A market is continuing to improve both in the US and globally, although the improvement so far is focused on a small incremental number of very large transactions. Of course what's pleasing for us is that we had an advisory role in 3 of the 31 $5 billion or greater deals announced globally in the first quarter. So we feel good about not only some improvement in market activity, but also the share of that activity we are involved with.

Now if you'll bear with me, I want to go into a bit more detail around Cogent, the acquisition we closed on April 1. Even as we enjoy some improvement in general M&A activity and an increased level of announced deal activity at Greenhill, we are also focused on increasing the breadth and depth of the firm's advisory capabilities and the resulting revenue opportunities which is what led us to Cogent. Our shareholders have universally reacted very favorably to this acquisition, but there's also been some confusing commentary on the transaction, so I thought a review of 7 questions would be worthwhile.

First, what is its business? Cogent is a leading financial advisor to pension funds, endowments, and other institutional investors on the secondary market for alternative assets. Specifically, we believe they are by a significant margin the largest advisor on sales of private equity interest from one institutional investor to another. It's business is much more granular or less lumpy than ours with many small transactions that has the scale and efficiency to do profitably. Certainly, it should add significantly to the diversity of our revenue and earnings.

Second, why were we attracted to Cogent? There are many reasons. It is a pure advisory business like Greenhill. It is a global business with a blue chip client base like Greenhill. It is seen as a market leader in its area of focus like Greenhill, but we believe it is less cyclical than Greenhill's M&A business. It focuses on what we believe is the business in the early stages of growth.

Remember, not long ago it was rare for an institution to seek early liquidity for a private equity investment other than in a distressed situation. Today, it is becoming increasingly common. On top of all the economic attractions of the combination, we believed after getting to know them that the Cogent team was an excellent cultural fit for Greenhill.

Third, what exactly did we get in the deal? We got the entire business, the full team spread across five offices, the global network of relationships, and the data on hundreds of past transactions, not to mention the well-earned reputation of the leader in this field. I know some questions were raised regarding whether we got the full team, so let me say categorically that we did. The only Cogent managing directors not referenced in our acquisition press release were a senior administrative person who in fact also joined us and a shareholder of the business who had not been involved in client advisory work for many years.

Fourth, how did we structure the transaction and what was our thinking behind that? There are a number of relevant features to the transaction structure. A significant part of the purchase price is subject to an earn-out based on revenue. We set that earn-out at a level that requires performance consistent with Cogent's strong results last year even though the team has strong incentives in the form of Greenhill common stock ownership and compensation going forward to grow the revenue base far beyond that level.

In the first quarter, as I said, Cogent's last as an independent company, it achieved more than $10 million of revenue on unaudited consistent with last year's strong performance and the momentum in winning new assignments continues to look good. The fact is we expect and even want Cogent to achieve the earn-out and if it does, we will have acquired the business at what we believe is a very attractive valuation.

In terms of form of consideration, we wanted to minimize the use of our stock at recent valuation, so we focused the use of stock on employee shareholders who will be continuing with us where there's an alignment benefit. For outside Cogent shareholders who are not involved in the business, we thought it was better to use cash, particularly given the low cost of debt these days.

Fifth, how should you think about the valuation metrics of this business? In simple terms, assuming the full earn-out is achieved, we acquired Cogent for about half of our revenue multiple. Given it has had a cost structure even more attractive than ours recently, that implies an even more attractive earnings multiple discount. And on top of that, as our press release today notes, we will benefit from cash tax savings as a result of the deal being structured as an asset acquisition for tax purposes, which allows us to amortize the deductible goodwill much of the purchase price over 15 years. In sum, you can see why we believe this transaction should be highly accretive for us.

Six, why would Cogent sell its business at that valuation as some have asked? There are many reasons beyond the fact that we believe the valuation was fair for a relatively small private partnership focused on one line of business. The main one is probably that the team cared about its future home, and they thought Greenhill provided the best fit. I think they also liked the potential up side upside in our stock, and in fact they are up 16% already from the announcement date when the number of shares was fixed. And, lastly, I think they liked our strong dividends, as well as dividend equivalents paid on restrictive stock.

Seventh and last, is it realistic that we could realize synergies that could make the transaction valuation even more attractive? We certainly didn't structure or price the deal such that synergies were necessary to make sense, but we do think there are many areas of synergies. On the cost side there are modest savings, things like combing offices which we've already begun to do. On the revenue side, the most important area of overlap is for our real estate focus capital advisory team to help find and win secondary transaction opportunities in the real estate sector, but that is not the only area of possible synergies.

For example, we are already taking advantage of opportunities like having Cogent bankers work with our financial services M&A bankers to seek business from financial institutions they cover. Plus there are regional opportunities for growth like leveraging our strong franchise in Australia.

Let me close by just briefly noting we are also excited about four individual M&A focused MD hires that we made in the first quarter in Houston, San Francisco, Sydney, and Tokyo. We believe each of these individuals has the potential to make a significant positive impact on our Business. In addition, it's worth noting that we supplemented our teams in various offices with some important lateral mid-level professional hires from a variety of big banks, as well as boutique firms.

Now I'll turn it over to Chris.

Thank you, Scott.

Our total revenue for the first quarter was effectively equal to our advisory revenue for the quarter, with the total revenue comparison to last year benefiting from no meaningful activity within our small remaining principal investment portfolio, relative to a write down in the first quarter of last year. Going forward, we expect a lack of any meaningful difference between our total revenue and advisory revenue to continue, given our very small remaining portfolio of principal investments.

I will now go into a bit more detail on compensation costs, non-conditions costs, dividends and share repurchases, and some additional detail on the financial impact of the Cogent acquisition. Starting with compensation costs. We achieved a compensation ratio of 54% for the first quarter of 2015, consistent with our full-year compensation ratio over the last two years. As we commented previously, we have consistently achieved our goal of GAAP compensation ratio, the lowest among our close piers, and we expect we are on track to achieve that goal again in 2015.

Moving to our non-compensation costs, our first quarter non-comp costs were $16.3 million, inclusive of the transaction-related expenses incurred during the quarter, including an increase in professional fees of approximately $1.2 million. Excluding the transaction-related expenses, our non-comp costs were consistent with our absolute dollar run rate over the last several quarters and remain well under control.

Looking at our dividends and share repurchases, our dividend this quarter was again $0.45 per share, consistent with the quarterly distribution made over the last several years. During the first quarter, we repurchased approximately 307,000 share equivalents at an average cost of $34.40 per share for a total cost of $10.6 million. As a result of our ongoing share repurchase activities, we ended the quarter with a flat share count to a year ago and we continue to maintain a share count that is effectively flat with our 2004 IPO, despite significant annual stock-based compensation and our 2010 acquisition in Australia, which compares very favorably with both our large and small competitors.

We ended the quarter with cash of $34.4 million and almost equal amount of debt as $34.7 million. Our board of directors just authorized the repurchase of up to $75 million of our common stock through the end of 2015, of which approximately 65 million remains available. The level and timing of stock repurchase activity gong forward will be driven by the timing of excess cash generated in our advisory business over the course of the year, and our timing of paying down the transaction-related debt associated with the Cogent acquisition.

Finally, some additional details on the Cogent acquisition and certain non-revenue impacts on our financials. We financed the initial portion of the purchase price with approximately 780,000 shares of our common stock and a new $45 million term loan consisting of two tranches of $22.5 million each. The shares will impact our diluted share count starting on April 1, 2015, and will be included in our shares outstanding and fully diluted share count going forward. The goal with respect to share count is to do exactly what we did following our Australian acquisition five years ago, that is to repurchase shares to offset all the shares we issued so in the future we can say what we can today, which is we have fewer shares outstanding than we did the day after our 2004 IPO.

The $45 million of debt borrowed will be reflected on our balance sheet as of April 1, 2015. The first $22.5 million tranche of the term loan matures on April 30, 2016, and we expect to pay that down over the course of the next 12 months from cash flow generated by the Business.

The second $22.5 million tranche of the term loan matures on April 30, 2018, and we also expect to repay that from cash flow over time. There are no prepayment penalties on the term loans and we will evaluate share repurchases versus prepayments on the term loans on an ongoing basis with the goal of returning to a no-net debt position while continuing to be opportunistic as it relates to returning capital to shareholders.

Both tranches of debt have an attractive interest rate with 4% for the one-year tranche and 4.5% for the three-year tranche subject to reduction following achievement of certain pay down thresholds. We also increased the size of our revolving credit facility to $50 million from $45 million, reflecting the increased size of our business and giving us greater flexibility to manage cash across our geographies. From a cost structure perspective, we do not anticipate the addition of the Cogent team to have a material impact on our compensation ratio, although it will increase our fixed compensation costs on an annual basis going forward, just as all new hires do.

From a non-comp perspective, including anticipated amortization of finite life intangibles as a non-cash item, we expect the acquisition to move our absolute dollars of annual non-comp costs from the low $60 million per year to the high $60 million per year. Our ratio of non-compensation costs to revenue should remain fairly flat or even decline relative to the additional revenue we expect the Cogent business to generate. Finally, while our reported tax rate will not be impacted, the transaction is structured to allow for the amortization of much of the purchase prize over a 15-year period, from which we expect to receive a cash tax benefit and effect lowering the net purchase price over time and benefiting our annual cash flow.

Now, let me turn it back to Scott.

To recap our start to 2015, we had a solid increase in revenue, we had 21 transaction announcements, far more than last year, including a fair number of big ones, spread across industry sectors, types of advice, and geographies. Behind the scenes we have many important wins from both new and longstanding clients. We acquired a very attractive complementary business in Cogent partners, adding 8 managing directors and a team of about 40 professions at a very attractive valuation, and we hired four additional managing directors and several talented mid-level professionals to enhance and support our teams globally. In sum, Greenhill is off to a strong start to the year and we are as confident as ever in the strength of the franchise moving forward.

With that, we're happy to take questions.

(Operator Instructions)

Our first question will come from Douglas Sipkin of Susquehanna.

Good afternoon, guys, how are you?

Good. How are you, Doug?

Doing all right. So, appreciate the color on Cogent. Maybe just drill in a little deeper, Scott, in terms of both markets, M&A, and then Cogent, specific to M&A, obviously a good start to the beginning of the year. Looks like maybe even better after that in April towards the end. So, I'm just curious to get your pulse, how you're feeling about the remainder of the year or over the next couple months? I know you came into the year I'd say cautiously optimistic. It seems like you guys are validating that, but I'm just curious to see if there's any update on that?

And then with respect to Cogent, obviously very encouraged to see a good start there. Little over $10 million, which is pretty consistent with the run rate there. The outlook for secondary transactions throughout the year, obviously on the other side of the equation, the alternative business for I guess your client effectively remains very strong, so I'm curious what you're seeing there?

Sure. Obviously, we try to stay away from too much forecasting. About the M&A market, I think we kind of feel like we did a few months ago, cautiously optimistic is probably a good phrase to use. People are busy, obviously we've had a good run in terms of announcements, and we're hopeful it continues. There have obviously been some stops and starts over the last several years in terms of the M&A cycle, but certainly our hope is this time it's for real in terms of the up turn.

On the Cogent side, it's just a very active market right now. I think in the secondary market, again, it began as kind of a distressed market. You essentially waited for the private equity fund to mail you back your realizations at some point unless you were really in distress. Today, we're almost in an opposite kind of market, where pricing is very firm, there's a lot of capital and dedicated secondary funds that are out there.

And, I think that a lot of owners of private equity interests, who wouldn't normally be sellers, are now looking at it and saying maybe at these prices I do want to lighten up my position, or maybe I want to reallocate less tech, more Europe, less real estate, more of something else. So, it seems to be, again, it's early days for us, but it seems to be a very active business in terms of new sort of bake-offs and client wins on the Cogent side.

Great, that's very helpful. And then just a clarification question for Chris on sort of the tax benefits from the way the transaction was structured. Is it reasonable to think about that, I guess on a straight-line basis, just thinking about the purchase price divided by 15 years and that's effectively -- tax affected, that's going to be your tax savings per annum?

That will get you close. We're finalizing the purchase price accounting and some of it will be allocated to finite-life intangibles that will amortize more quickly and you will see those through the P&L. We obviously did buy some assets that will come over and depreciate on their own schedule. But, I think take a discount to the purchase price, apply straight line, and that will get you fairly close.

Great. And then with respect to hiring, recruiting, it looks like you guys are off to a pretty good start there, actually probably a little faster, not even including the Cogent side than you have in some time. Maybe a little perspective there, what you're seeing in terms of the environment for recruiting. It feels like the business has been pretty strong for the industry, yet it also still feels like there's quite a lot of movement to the boutiques or the independents, so to speak, so I'm curious how your outlook looks there.

I think it's still pretty favorable outlook, I would say. You never know when these things are done. On our last quarterly call, I couldn't tell you about much of any of these things. I thought we were on the brink of Cogent, I thought we were on the brink of the three more MD hires, and in fact they did come through in just really the days and couple weeks after that call. You never know until you finally get -- it's like an M&A deal. You don't know -- it's not done until it's done.

It still feels like there are a lot of people interested in moving. It certainly feels like there continues to be people interested in leaving the big bank kind of environment to go to a place like ours that is really much smaller, less bureaucratic, less political, and more focused on what those individuals do. So, hopefully you'll see more as time goes on, but even if you don't, obviously it's been a big year for us already.

Okay, great. That's all I got. Thank you for taking the questions, guys.

Thank you, Doug.

The next question will come from Devin Ryan of JMP Securities.

Great, thanks. Hey, guys.

How are you, Devin?

Doing well. So, I guess you're staying on Cogent now with the deal closed. If we were to apply 2014 revenues as kind of our starting point, the deal would seem to be accretive out of the gate and could be nicely accretive.

As I work through some of those considerations that you guys talked about in the prepared remarks and some of the puts and takes, am I missing anything there? And then, with respect to revenue recognition, how lumpy does it tend to be from quarter to quarter for that business?

Well, I've only owned it for a couple weeks, so I probably can't give you too much perspective on the quarters. But let me say this, I think it's, as I said, the math is pretty simple. If we bought something for roughly half our revenue, if their cost structure is the same as or even a little better than ours, even before you think about anything like synergies, clue to that map tells you that, unless something dramatic changes going forward, it's an accretive deal, and maybe potentially a significantly accretive deal.

In terms of how the revenue comes, as I noted, it is much more granular than ours. They have the size and efficiency, I think unlike any of their real competitors, that they can do actually quite small things very quickly and efficiently and profitably, even though the fee may not be large. So they do -- like us, they have some fees that actually are quite large, but they have lots of them that are very small as well.

My guess is that over time that means it's less lumpy than ours, simply because the fees tend to come in smaller chunks and there's just a lot of small ones that get mixed in there. So, I would probably think of it as being a little smoother ride than certainly the M&A business is, where you can have one gigantic fee can be a big part of a quarter's revenue.

Sure, okay. Good, that's helpful. I just wanted to clarify on that.

And then, secondly just on Europe, maybe more broadly, we're starting to see a pickup in cross-border activity going into Europe. So what you are you guys seeing in Europe, and then with respect to cross border, and how do you feel like your positioned to the extent cross border really is a pretty strong theme, here, over the next year or so?

I think we've always had a great European business. We've been in London almost as long as we've existed as a firm. We've been in Frankfort for something like 15 years now, so we have a long presence there and a long track record. I think particularly in the UK market, which is by far the most active one always in Europe, I think we are very well positioned.

We are certainly seeing some more activity. As I said, it feels more heavily weighted than we probably would like to the US, but we had some big successes, including cross border into Europe during the quarter, and I think I continue to think European M&A is going to return to its historic position of being something that's not that different from American M&A. It just hasn't been there in quite a number of years for obvious economic reasons.

Yes. Okay. Great, I'll leave it there. Thanks a lot.

The next question comes from Joel Jeffrey of KBW.

Good afternoon, guys. Believe it or not, you guys answered most of my questions on Cogent in your prepare remarks. I guess the one thing I'm curious about here is you talked a lot about the upside, I'm just wondering in this business, what's the risk to it? Where is the potential downside and what kind of markets would those occur in?

First of all, thanks for making me feel good about reading an entire page of detail on Cogent. I was hoping it would be somewhat useful. There's -- with any acquisition -- we're in the M&A business. With any acquisition, obviously there's risk in terms of just integrating the team and sort of letting them sort of do what they do without bothering them, but also trying to get whatever synergies you can, so there are those kind of general risks in any deal.

But, I think the nature of their business, I think, is fairly low risk. Again, we kind of waited before we went ahead and did this transaction and watched this kind of sector, this industry for a number of years. And part of it was because we weren't sure if it wasn't just a distressed business, one where there's a lot of desperate sellers dumping the stuff on the market in years like 2009. And we wanted to see it how it evolved and behaved in a much more normal market.

And certainly, again what you're seeing right now, a lot of activity, a lot of new assignments, and in many cases now it's sellers, new sellers coming to the market and thinking, hey, if I can get a price somewhere around NAV, net asset value, according to the PE funds marks, then I'm interested in exploring that. So, I think certainly you could you have pauses here and there if you had a big down draft in valuations or something like that, but frankly, a big down draft probably causes a big flurry of activity as buyers get anxious to put money to work at discounts and the sellers maybe are somewhat in need of liquidity.

And I think we're seeing, right now, the flip side of that, which is the robust market with higher valuations, and so we think it's a business that's durable, and again in the very early days of its history. If you go back 10 years ago it was very simple. If you invested in a KKR Blackstone fund, for the next five years you put money in, and for the five years after that, you got money back. And it's only really a fairly recent phenomenon that institutions are regularly kind of reallocating their private equity portfolio by using the secondary market.

And then, in terms of the sort of barriers to entry to this business, is this very much like the M&A business where it's very relationship driven?

To some extent, but I tell you the barrier of entry they have that is quite a bit bigger than in the M&A business where somebody could start a boutique if they knew 10 clients or if they knew one industry very well or one region of the world very well. They really have, number one, a global network with hundreds, maybe even probably thousands is really the right kind of figure of investors in private equity funds all over the world. It's not that easy to build that network everywhere from the Middle East to Asia to all over the US and Europe.

Secondly, they just have so much experience. I have seen, personally, bake offs they've been in where I've attended where the perspective client says I'm interesting in exploring a sale of these huge number of funds, and the Cogent team is able to say, well, we have actually transacted in most of those funds. We know who bought them, we know what price they bought them, we know who's interested and more, and they can't say that about every fund, but they can say that about a huge number of funds just given the volume of business they do.

So I suppose it's like any business. If you're the number one and you have the highest volume, that volume becomes your biggest selling point with each new bake off you get into.

Okay. And then just lastly for me, I think you said that the cost of the transaction was about $0.03 in the quarter on the expense side. What expense line item does that fall into?

Mostly legal type expenses and things, legal and accounting, things like that.

Okay. Great. Thanks for answers my questions.

Thank you.

Our next question comes from Jeff Harte of Sandler O'Neill.

Good afternoon, guys. A couple left from me. One, from a cash flow perspective, the need to pay back $22.5 million of the debt over the next year, how does that impact kind of -- I know it's not any type of dividend, but how does it potentially impact the buyback? It would seem you're going to have to dial back the buyback versus previous years to kind of to hit that.

I think in the very early days as we go through the next 12-plus months, until that first bit is due, obviously we will focus on paying down some of the debt. But as Chris said, we do have the ability to sort of toggle back and forth between repaying debt faster or buying back stock, and we're going to do that opportunistically based on what our cash flow is, what our outlook is, what the deal flow that we're seeing for both ourselves and Cogent. And certainly, we don't expect it's going to be much of a challenge, given not only our cash flow, but all the incremental cash flows that comes from Cogent.

Okay. And as you sit here now, what's the current -- I guess post Cogent, what's the BSMD count going to be? And I'm just kind of thinking it was 68, do we add 8 and then 3 more hires?

It's like 78, I think is the right number to use.

Okay. That's it for me. Thanks.

Thanks a lot, Jeff.

The next question is from Brennan Hawken of UBS.

Good afternoon.

Hey, Brennan.

So just to finish off some of the Cogent questions, or at least for me, you guys borrowed $45 million. Do we just add that to the debt that you had on the balance sheet as of year end and get you to the ballpark of about $80 million? Is that how we should think of the 1Q balance sheet?

Yes, because obviously the debt arrives the day after the quarter ended.

Yes, right, perfect. Okay. And then should we think about any more transaction costs in 2Q coming? I know you had a little bit, just from a ticky-tack modeling-type question here.

Anything would be absolutely trivial, so, no, I wouldn't think about anything.

Okay, terrific. And then one more question here on sort of the M&A business, I know you made reference a few times to Europe. Are you seeing anything in your backlog showing some improvement on the continent at this point? Maybe give a little bit of additional color on that front?

It's hard, obviously, as activity starts to pick up. Europe has been fairly quiet for some years now. Look, there's lots of dialogue going and there's lots of activity we hope will turn into transaction announcements, but you've got to kind of wait and see how it plays out. We're hopeful but we're not predicting, let's put it that way.

That's fair. Okay. Last one for me. It seemed like there's been a shifted tone around deal size and which ones are important for you. So, I was hoping you could maybe clarify for me.

Yesterday, excuse me, last year, it seemed like the indication was that the mid-market size deals were missing, and that was a problem for you guys to kind of get on those, but it seems like this quarter, it's a bigger benefit that there's large deals. And so can you help me understand which one is more important for Greenhill and what we should watch for the key indicators for you guys for revenue outlook?

Sure, yes, it's a good question. I think all firms like ours have to sort of spin their story slightly differently about what kind of deals they tend to work on. Regardless of what we all say, we all work on very small deals, we all work on very big deals.

What we have noticed and have shown in data in some of the presentations that we've done that posted on our website over time is if you just look at all the announcements that we and others have made over, say, the last couple years, you do find that we are more heavily weighted toward $1 billion or greater transactions, or I think the other threshold I had was $2.5 billion or greater transactions, and that's where we want to be.

It doesn't mean we don't do small deals for important clients that we want to do even more things for, or we don't do small deals that can help build us credentials in a particular sector or region around the world, we love doing those deals. But, we do want to be weighted toward the bigger deals, call it $1 billion or greater. I do think those deals are obviously more profitable because it takes roughly the same kind of team to do $1 billion deal as $250 million deal.

And, they obviously add more to the brand because they get more attention, they're better known companies, et cetera, so we do a bit of everything. But, I'm very pleased that among the sort of boutique firms out there, certainly the public ones, we have a little bit bigger weighting toward $1 billion or greater transactions.

Okay. Thanks for the color.

Sure.

Our next question comes from Vincent Hung of Autonomous.

A few quick questions. First one is for the purposes of the tax rate, what is the split of US versus non-US revenues this quarter or earnings?

We only give that once a year at the end of the year. I think the tax rate doesn't vary all that much, but we don't want to break it down by every region every single quarter. It's not that meaningful. The business is too lumpy for that to be meaningful.

Just on Cogent. Is there any sort of seasonality in that business like M&A?

I'm not even sure there's seasonality in M&A to be honest. No, I don't think there is. Their deals tend often, for obvious accounting reasons, to sort of close on the last day of a quarter, when the private equity fund can change the ledger that went from owner X to owner Y. I think it generally happens all year round.

Okay. And how many transactions did Cogent work on in the first quarter?

We don't want to quantify that either, but it's a lot. As I said, they do lots of small things as well as some larger things. So, it is a more granular kind of business than M&A, where often for any firm, I think a few of the big transactions can really drive the outcome.

Okay, and just last one for me. Can you talk about how you got to the earn-out of [$80 million] of revenues and opposed to using maybe a higher revenue figure or even an earnings target?

That's actually a good question. We have done a lot of earn-outs. Obviously we did one in Australia. I've advised companies many times over the years on earn-outs. My theory on earn-outs is you want to set it high enough that the people you're bringing in try very hard to achieve it, but you don't want to have it so high that if there's say a downturn in overall activity, they get demoralized because suddenly they realize a year into it that they're never going to get the earn-out. To me that's just a disaster for the acquiring company.

So we set it at a solid respectable level of basically a $40 million a year run rate of revenue. It's a bit below where they were last year. It doesn't mean we expect that to be outcome by any stretch, and they have got, as I said, every incentive through owning Greenhill stock and restricted stock and getting annual compensation to drive it as highly as possible.

Our goal is to make it meaningful, that we kind of get our money's worth if they miss by a lot. We want to pay effectively a lower purchase price, but on the other hand, we want it to be not so high that it becomes kind of de-motivating for the team when they realize that maybe they might not reach it.

Okay. Thanks a lot.

Thank you.

Next question is from Michael Wong of Morningstar Equity Research.

Good morning -- or good afternoon.

Good afternoon.

You specifically said new growth initiative in the earnings release, but is this just a description of what occurred in the quarter or is it a strategic change that could persist going forward?

We're always -- as I often say, we're always looking to grow the firm constantly in three different ways. We want to be more broad in term of geographic scope, we want to have more industry sector expertise, and we want to have more types of advice. And it just so happened that this quarter was one where a lot of those things came together.

Obviously Cogent means a whole new different type of advice. The people we hired in Japan and Australia, very senior people, add a lot to our geographic capabilities. And then we hired industry sector specialists in Houston and Silicon Valley, so obviously we increased the industry sector. So, we're going to keep looking for similar opportunities, and hopefully we'll have some more even over the course of this year.

Okay. You also mentioned in the release that comp was partially up from less like RSU forfeitures, so I was wondering, is there a specific time frame over which you'll have greater certainty about any potential managing director departures?

No. All we were referring to there was really just in comparison to last year. Last year we had a few people early in the year -- I can't even remember all the details, but we had some RSU forfeitures last year that had an impact on sort of the timing of compensation accruals. There's nothing unusual this year, and certainly I'm not expecting anything in that regard. The whole remark really refers to things that happened a year ago, not to things happening right now.

Okay. Thank you.

Thanks.

Next we have Ashley Serrao of Credit Suisse.

Good afternoon, guys.

Hey, Ashley, how are you?

I'm okay. I just wanted to follow up on Vincent's question. You spoke to the revenue target, and hear you loud and clear on the $40 million annual run rate. Could we just talk about the earn-out structure where you give the Cogent employees effectively a second bite of the apple in case they missed the first two year earn-out. Why do you structure it like that?

Again, it really is exactly along the theme that I just spoke to a minute ago about my theory of how you best structure earn-outs. Think about this earn-out versus, for example, Australia, which worked out fine I think and played out as we intended the earn-out to work. That was a longer one. That was a three year plus a two year earn-out, two totally separate earn-outs (inaudible) them both.

This time around we went for effectively one pool of money, one earn-out, but they get essentially two bites of the apple. And that really was just learning from seeing other earn-outs over time and realizing that if you have say a two-year earn-out, or even worse, a shorter-term one, and you get a year into it and the team says, wow, the whole market turned down. It has nothing to do with us, but the market turned down, activity turned down, that gave us a tough year and there is no way we're going to make that up in the second year. You could have people, only a year into a deal, say, I don't want to say it didn't work out. I thought we were going the earn-out, somehow it didn't work out.

By doing this, you keep people fully motivated for the first two years, and even if they get part way through, which again, you heard the numbers, I don't think is going to be the case, but even if they got part way through and thought we're not going to make that earn-out, they have every incentive to stay for years three and four to try to do it again. So, I think it's hugely in our favor in terms of retention and just stability and people just focusing on the longer term, rather than kind of delivering a lot of revenue in a short term and not worrying about long term.

Okay. That makes sense. And then just wanted to, just a clarification on the compensation ratio commentary for Cogent. Just wanted to make sure you are referring to 54% as a good starting point?

Yes. The way I would view it is just kind of folding them into us. In other words, I wouldn't change any sort of compensation or ratio assumption as a result of that transaction. I would -- whatever you're assuming is going to be our compensation ratio without Cogent, I would assume the exact same thing with Cogent being part of us.

We have contractual arrangements with them about -- with some of those individuals about various things we wouldn't want to go into that kind of detail, but I think a good modeling assumption is really no change to the comp ratio as a result of them joining.

Okay. And then you've invested a lot this quarter. How are you thinking about hiring through the balance of the year? What remains to be done, in your mind, balance of the year or looking out even further?

It's a never-ending list. It's not like you ever -- you're not at Colgate and say, geez, I think we're selling enough toothpaste now. You're always looking for more ways to grow the business and so we're looking for more ways. These things, as I've always said, they come in streaks, effectively, and I know, in fact on this call, I got some questions a quarter ago people wondering about recruiting or are we going to have people. I thought we were on the brink of a whole bunch of them but wasn't in a position to disclose that yet.

I think this obviously already it's been a big year, but it doesn't mean we stopped looking. We have got some people we're talking to in quite advanced stages and in a number of different locations and sort of industry sectors and so on. So, our outlook and our goal in terms of recruiting is completely unchanged by the fact that we already did 12. If we find five more wonderful people, we would love to welcome them all into the firm. If we don't find any more but we find more in 2016 and beyond, we'll be happy to take them then. We're always fishing for the good fish.

Thank you for taking my questions.

Sure. Thank you.

I think that's our last question, so thanks all for joining and thanks for your patience with some of the details on Cogent. Bye, now.

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