Lazard Inc (LAZ) 2020 Q3 法說會逐字稿

Good morning, and welcome to Lazard's Third Quarter and 9 Months 2020 Earnings Conference Call. This call is being recorded. (Operator Instructions) At this time, I will turn the call over to Alexandra Deignan, Lazard's Head of Investor Relations. Please go ahead.

Thank you, Holly. Good morning, and welcome to Lazard's earnings call for the third quarter and first 9 months of 2020. I am Alexandra Deignan, the company's Head of Investor Relations. In addition to today's audio comments, we've posted our earnings release and an investor presentation, which you can access on our website at www.lazard.com.

A replay of this call will also be available on our website later today. Before we begin, let me remind you that we may make forward-looking statements about our business and performance. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including, but not limited to, those factors discussed in the company's SEC filings, which you can access on our website.

Lazard assumes no responsibility for the accuracy or completeness of these forward-looking statements and assumes no duty to update these forward-looking statements.

Today's discussion also includes certain non-GAAP financial measures that we believe are meaningful when evaluating the company's performance. A reconciliation of these non-GAAP financial measures to the comparable GAAP measures is provided in our earnings release and investor presentation.

Hosting our call today are Kenneth Jacobs, Lazard's Chairman and Chief Executive Officer; and Evan Russo, Chief Financial Officer. They will provide opening remarks, and then we will open the call for questions. I will now turn the call over to Ken.

Good morning. Our third quarter results reflected strong performance across our businesses, as Financial Advisory and Asset Management both gained momentum. Our Financial Advisory results underscore the benefits of our diversified advisory platform. Our strategic and M&A activity accelerated even as our restructuring work continued at a robust pace.

In the third quarter, Lazard's global announced M&A volume increased 64% year-over-year compared to the market's increase of 38%. Over the first 9 months, our volume rose 5%, even as the markets volume declined 24%. Our strong and established footprints in Europe helped drive the gains, as our European M&A announcements rose significantly in the third quarter.

Our preeminent global restructuring practice had a strong third quarter, as we continue to be engaged in a wide range of complex assignments for both debtors and creditors.

Year-to-date, Lazard is #1 in the league table for both announced and completed restructurings. Our Sovereign Advisory practice is also seeing increased activity, as we work with governments to restructure debt and strengthen balance sheets.

In the third quarter, we completed restructurings for both Argentina and Ecuador, and we continue to gain assignments from countries facing unprecedented financial challenges. We continue to see growth opportunities across our advisory businesses. Year-to-date, in Financial Advisory, we brought on 12 new managing directors globally. This includes last week's recruitment of a London-based team with expertise that complements our capital markets and shareholder advisory practices.

Our Asset Management business benefited from strengthening global markets in the third quarter, with average assets under management increasing 8% sequentially from last quarter. Gross flows continue to be strong, and we achieved net inflows in August and September.

Net inflows have continued this month, reflecting demand across our platforms. We are investing in areas where we see high growth potential, including strategies focused on sustainability and ESG, quantitative investing and alternative thematic strategies.

We recently announced the addition of thematic teams to our global and emerging markets platforms and a long short credit team on our alternatives platform. We continue to seed new strategies and launch funds to meet investor demand. We're also seeing an increase in solutions-oriented mandates, as we serve more clients with customized strategies.

Firm wide, our results underscore the strength of our diversified business model, global platform and a deep culture of client service. Our clients are dealing with unprecedented challenges and uncertainties caused by the ongoing pandemic, and we're providing them with expert advice and innovative solutions.

Evan will now provide more color on our financial results, then I'll comment on our outlook.

Thank you, Ken. Lazard's third quarter operating revenue of $569 million, was our strongest quarter of the year, as both of our businesses gained momentum.

Financial Advisory third quarter operating revenue of $307 million, was 1% higher than last year on increased M&A and restructuring activity, reflecting an acceleration in the business.

This quarter's M&A revenue included announcement fees and completion fees for several transactions that were announced and closed during the quarter.

Restructuring revenue reflected the continued high level of activity in our global practice. Asset Management operating revenue of $261 million, was 8% lower than last year, reflecting lower average assets under management as well as an impact from product mix shift, as flows trended towards quantitative and fixed income strategies.

Average AUM for the third quarter was $226 billion, 8% higher than the second quarter of this year and 3% lower than a year ago. We finished the third quarter with AUM at $228 billion, 6% higher than the start of the quarter.

The increase was primarily driven by market appreciation of $9.5 billion and positive foreign exchange movement of $3.7 billion, with net outflows of $0.2 billion.

The quarter's net outflows were driven primarily by local and emerging markets equity strategies. We achieved net inflows across our fixed income platform as well as in our global and multiregional equity platforms.

As of October 23, our AUM was approximately $234 billion, reflecting market appreciation of $4.7 billion during the month, positive foreign exchange movement of $1.2 billion and net inflows of approximately $0.6 billion.

Looking ahead across our franchise. In Financial Advisory, increasing M&A announcements at high levels of activity across our advisory practices position us well going into 2021.

In Asset Management, we continue to win significant mandates across our multiregional and global platforms. We are seeing demand for both our quantitative and fundamental products across our platforms as well as growing demand for our sustainable and customized solutions.

Turning to expenses. In the third quarter, we accrued compensation expense at a 60% adjusted compensation ratio, in line with our accruals year-to-date.

Non-compensation expense of $103 million, was 18% lower than the same period last year, primarily reflecting a continuation of lower travel and business development costs.

Our adjusted non-compensation ratio for the third quarter was 18.1% compared to 21.3% in the third quarter of last year. Our adjusted effective tax rate in the third quarter was 27.9%.

For the first 9 months, it was 26.9%. We expect an annual effective tax rate for this year in the low to mid-20% range. Regarding capital allocation, our business continues to generate significant free cash flow, which supports our goal of returning excess capital to shareholders.

Throughout the year, we have been consistent in returning capital through our quarterly common dividend. In the third quarter, we returned $50 million of capital to shareholders. Yesterday, we declared a quarterly dividend on our common stock of $0.47 per share. Lazard's financial position remains strong, with ample liquidity and balance sheet flexibility.

As of September 30, our cash and cash equivalents were $1.1 billion. Ken will now conclude our remarks.

Thank you, Evan. I will provide some perspective on our outlook, and then we'll open the call to questions. The global macroeconomic outlook continues to be uncertain.

The shape and pace of economic recovery will depend in large part on the course of the pandemic, its impact on local economies, and ongoing government responses.

Nonetheless, corporate strategic activity is growing and capital markets have been resilient. Our conversations with clients are constructive, and we are cautiously optimistic that the momentum in both our businesses will continue.

In Financial Advisory, the economic impact of the pandemic continues to drive disruption unevenly across sectors. Well-capitalized companies are seeing opportunities to strengthen their competitive advantages through strategic activity.

Private equity sponsors are increasingly active as both buyers and sellers, financially challenged companies are looking to divest assets or restructure, and there is reason to expect restructuring activity to pick up in 2021.

In Asset Management, we see evidence that dislocations in markets and a dispersion of returns resulting from the pandemic are creating stronger demand for active management. This combined with investors' desire for customized solutions and sustainable portfolios, should continue to drive demand for our services.

Lazard is well positioned in this environment with a diversified business model, a global client base, an unrivaled expertise in M&A, strategic advisory, restructuring and asset management solutions.

We remain focused on serving our clients well while we manage the firm for profitable growth and shareholder value over the longer term. Now let's open the call to questions.

(Operator Instructions) We will now take our first question from Richard Ramsden from Goldman Sachs.

So perhaps we can just start a little bit with what you're seeing in the European M&A market. I know if we look at the aggregate data, it hasn't picked up as quickly as what we've seen in the U.S. Can you talk about why you think that's the case? And whether you see anything on the horizon that could change that?

And then perhaps as a follow-on, you're obviously seeing insurgence in shutdowns across Europe as COVID rates increase. Do you think that will have a material impact from your existing customers that you have in terms of your ability to close those deals?

Okay. Two parts to the question. First, Europe, obviously, the U.S. has seen a quicker acceleration of large deal activity over the course of the last couple of months or so, but there's been a steady pace of what I'd describe as medium-sized transactions in Europe really since June or July.

We haven't seen as many of the very large transactions as we've seen in the U.S., but it's been a steady pace activity at least for us during this period of time.

As far as the closings are concerned, I guess, there's two different parts to that. The first is, I think all of us have adapted well to the more restricted environment.

Deals are being done effectively virtually and have been in the U.S., largely since M&A activity picked up and the same for Europe. So the ability to complete deals because people are in confinement, we don't see that much of a change as a result of that. There may be some complexity around some of the government approvals, if actually people aren't going into government offices to get these approvals, but so far, we haven't seen much impact from that.

In terms of deal activity, the differential impact on economies, obviously, has impact on deals. But again, one of the features in this environment is that most of the deal activity we've seen to date has been driven by the fact that the companies that are engaging in this activity are able to have a little bit better ability to have confidence in their predictions about the future, and that's gotten them confident in terms of their ability to both price and manage transactions.

And that's where you've seen a lot of the activity, technology, biopharma, areas where you have companies that are winning because of the environment because of technology.

I should add financial services. Those are areas where we're seeing a pickup in the activity. That probably doesn't change too much with the closings.

I think where the closings are going to have an impact is on companies that have pushed out financing but the recovery of their business models are being pushed out because of the second wave or additional waves of the pandemic.

Those businesses are going to have a harder time, and that's where we're likely to see a pickup in restructuring activity. And we're already seeing that in Europe right now.

Okay. And then perhaps as a follow-on, could you talk a little bit more about the restructuring business? I think I'm right in saying that if we go back and look at the last crisis, restructuring was around 30% of your advisory revenues.

What do you think the peak this time could be in terms of contribution to advisory? And based on the pipeline, when do you think restructuring revenues will peak?

Well, that's a great question because a lot of it has to do with what happens with M&A activity because, obviously, to the extent that there's little M&A activity, restructuring is going to be a much bigger proportion of Financial Advisory revenues.

And to the extent that M&A activity accelerates, it's going to be as a percent lower, but in terms of absolute terms may be higher than it was in the last cycle.

What we've seen so far is a high level of restructuring in the first part of this year, driven by companies that were already in difficulty prior to the pandemic, those companies, the restructuring of those companies accelerated with the onset of the pandemic, they had a difficult time getting additional financing.

Their business models were immediately challenged by the restructuring. Oil and gas, retail being two great examples of that. And that was the first wave of restructuring activity.

We saw a slew of companies that were highly leveraged, whose business models were a little bit more resilient at that point, debt financing in the first stage of the crisis through the liquidity of the market, some extent from governments, both here and in Europe. The crisis has probably gone on longer than that financing will last, and the business models haven't recovered, that is likely going to be the second wave of restructuring.

And we're starting to see that pickup in Europe right now. We didn't see much in the first wave in Europe, but we're starting to see those companies start to have the need to restructure now.

And with the lack of stimulus in the U.S., the depth of the pandemic now in the U.S., we're likely to see a pickup in activity in the second wave in the U.S. So this is a restructuring cycle where the restructuring levels in absolute terms for the first part of this year have been high.

And our guess is we'll continue to be at that level through the end of this year. That's the roll-off of the first set of restructurings. And then the real question is, do we see a second wave of activity, which I think we're beginning to -- we're beginning to see in fact the first wave in Europe now. And we would expect to start seeing the second wave of activity in the U.S. this fall into the winter, absent some kind of strong recovery and/or another round of very strong stimulus.

But in any event, it probably picks up.

And then the unusual feature of this environment where we have a high level of restructuring activity is the acceleration of M&A activity, at least for our business, we saw a real acceleration in the third quarter in announcements and closings and we expect that likely continues into the fourth quarter and the early part of next year, and then we'll see what happens.

We will now move to our next question from Michael Brown from Keefe, Bruyette, & Woods.

So I guess, I just wanted to start with just kind of the inflows. I just wanted to confirm, Evan, did you say the inflows was $0.6 billion? Is that correct?

Yes, that's correct, Mike. $0.6 billion as of the end of last week for the month of October.

Okay. Great. And where are you kind of seeing those inflows? Just trying to get a sense of where you're seeing some of the strength on the flow side. And any color as to how some of those mandates that you won, how those are starting to flow in? Is that what's kind of driving the net inflows that you're referencing? And is there potential for that to continue throughout the quarter?

Sure. So Mike, as we called out at the end of last quarter, we started to see significant activity. We called out that we had a significant backlog of unfunded mandates that we have won for our business spread across really the entire platform.

And you started to see that come across in August and September, the monthly flows, which were both positive for us. And continuing into October, where we have even more accelerated net inflows as of a week ago for the month of October.

So yes, it's a continuation of the theme that we started to see at the end of last quarter as we were building that unfunded pipeline. I'd say that the continuation has continued for us, really, over that period of time. And it's really spread out across a whole slew of areas.

There's no one specific area that we started to see it. We had net inflows this quarter, as we called out in our international strategic net flows positive as well as in our quant and of course, in our global converts business as well.

So these are all areas that are performing well and seeing significant flow traction, but it's really broader than that. I mean it's across all of the areas across all of our platforms. I mean it's really very much spread apart.

And that's what gives us a little bit more confidence because it's not just one mandate, one large mandate or one specific strategy that is doing well. It's been pretty broad-based in a lot of different areas.

Okay. Great. And then I just wanted to talk about the comp ratio. So it looks like you're running at 60% year-to-date. I guess, one, is that kind of a fair expectation for the year? And then as we move into '21 and hopefully, it's a better revenue picture.

And so against that assumption, is it possible to kind of move back to your target range of 55% to 59%, which I believe is kind of your target through the cycle?

And I guess, is that still your target range? And at what point would it be possible to kind of drift back to something like a 55% comp ratio?

Is that still a feasible target just given your revenue mix or the competitive landscape? I'm just trying to understand if that's still a fair way to think about your business kind of longer-term through the cycle?

Yes. Sure. So let's start with the first part of the question, Mike. So third quarter, we accrued compensation at 60%. That's where we've been accruing all year. Look, that's our best estimate for the year.

But obviously, we'll continue to develop as we see the final revenues and sort of what hits the end of this year. So it's obviously very revenue driven. There's also a lot of factors, as you know, that go into the final comp number.

Obviously, the business mix for us, the geographical mix of our business, the marketplace for talent. We do a bottoms up. As we always say, it's a bottoms-up at year-end. There are a lot of components that could move that around. But 60% is our best estimate at this point in time. It's obviously important to remember, as we always point out, we're a firm of intellectual capital.

Our people are the critical assets of our firm, and our growth is built on hiring and retaining the top talent.

So as we've always done, we're going to continue to focus on incentivizing our top performers and while continuously thinking about balancing and how we balance short-term and long-term outlooks.

To the second part of your question, when I think about the longer term, we have been managed with discipline for a fairly long time, probably over almost the last 10 years been in the range that we've set out of the mid-to-high 50s, 55% to 60% area where we've been accruing compensation on an awarded basis during that period of time.

I think, what will drive that next year is going to be, first and foremost, as it always is, is the pace of revenues. And so as revenues grow, as you get some revenue growth in the business, the natural growth in the business, that's going to help us to remain in that range where we've always been.

So I think we're still fairly comfortable with the steady state business, we're comfortable being in that range. Obviously, a lot of factors that change that the biggest historically has always been the pace and level of investments that we're making in the business.

And as we continue to think about where we see opportunities for bigger growth longer-term and the investments we want to make there, that could have an impact on our compensation line.

But the steady state part of our business given where we've been, I think we're comfortable with that range.

You said, when do we get to the lower part of the range? We were there just a couple of years ago, I mean, during periods of stronger revenues.

So I think we've proven that when strong revenues come, we're able to trade at the bottom part of that range, weaker revenues we're going to trade at the higher part of that range, but we've always sort of managed that whole process with the discipline, but, of course, focusing on incentivizing our talent and making sure that we can continue to invest in the business and focus on the growth of the business over the long term.

We will now move to our next question from Devin Ryan from JMP Securities.

First question here, just on the M&A recovery. And really, what I'm trying to get at here is the drivers behind it and kind of what you guys are seeing or thinking. And really, it just feels like such a quick and strong snapback, which I also think just speaks to how important strategic information is right now just as the speed of the world continues to pick up.

And so I appreciate there's some macro risks here and with the election next week. So there's, obviously, things that could temporarily disrupt activity. But it feels like it's hard right now to hold back M&A, just given how critical it is in kind of strategic conversations.

So I'd just love to get some thoughts from you guys around what's really driving activity? And does that feel like a reasonable thesis this year?

I think that's a great question, and I think your thesis is right. Traditionally, we look at M&A activity as a function of 3 factors: financing, equity market valuations and CEO and Board confidence. And then usually, there are a couple of longer-term catalysts underpinning that activity, and it remains the same for us today. Financing is widely available at historically low rates.

Equity valuations have been, in some sectors kind of rich, others not. But generally speaking, the cheapness of the financings offset some of the valuation considerations in many instances.

And then importantly, with regard to CEO and Board confidence, increasingly, in industries where you see high levels of activity, those happen to be industries where Boards and CEOs have a better ability to have confidence in their predictions about the future.

And so they're engaging in more activity. You don't have to necessarily be optimistic, but you have to have some confidence in your predictions. And those industries have been technology, biopharma, increasingly financial services, some of the energy sectors and such.

And then there are other areas, I'd say, newer energy sectors.

And then there are other areas where the stress on the economy is forcing the activity. That tends to be areas where there is real pressure on businesses where you're seeing some activity.

The catalyst for all this is best we can tell are probably twofold. A major catalyst is just that all the trends that were in place prior to the pandemic are being accelerated.

The industries that are going to come out of the pandemic in a strong position, technology, biopharma, you're seeing a lot of activity there.

Companies which have stronger market position, stronger balance sheets, probably are ahead of their competitors in implementing some of the technological change that's going on into their business models are also taking advantage of those positions to improve their position strategically through deals.

And weaker companies are having -- are finding that there's increasing pressure to deal with many of the challenges in their business through portfolio adjustments and frankly, in many cases, restructurings.

And then there's a smaller trend, but an important one, at least as far as the fourth quarter is concerned, which is there's some acceleration around activity around selling businesses in anticipation and perhaps some changes in tax codes, if there's a change in administration.

So I think we're going to see some pickup in activity in the fourth quarter around it as well. Now whether that persistent to next year remains to be seen. But I think the first catalyst is with us for quite some time.

Okay. Thanks Ken. Appreciate the color. And then maybe just a quick follow-up for Evan, just on the expense structure, thinking about kind of more holistically, as we kind of get back into maybe a more normal business backdrop here.

And I appreciate some of the -- on the non-compensation side, some of the expenses were kind of moving targets and your travel will likely pick back up.

But I'm curious kind of how you think about -- or would suggest kind of framing for us kind of modeling out just given that I feel like travel will remain lower in the near term.

And then as we get back to something that's more normal, is there still some overall, call it, expense depreciation, just given that you guys would learn things through the pandemic around the expense base? Or there's just going to be expenses that maybe don't come back in full force?

Yes. Sure, Devin. So look, as you said, in the quarter, our non-comp expenses were down approximately $22 million in the quarter. And a significant part of that related to the marketing and business development expense with specifically a big chunk of that being travel and entertainment.

So $14 million of the $22 million is really related around that number around for travel. So look, I think it's broader than just travel. I think we've been focused on thinking about expenses this year given the decline in revenues, we've been thinking about what kind of projects and other expenditures that we had this year, making sure that we're making the right decisions in the context of the environment.

Of course, some of this is offset by some COVID-related expenses that we have in our offices, cleaning and PPE and technology in some other areas. So I think it's still a moving target as to how that plays out.

I think I'd say over time, and what we saw in the third quarter relative to the second quarter as we started to see a little bit more in the travel side, a little bit more on the marketing and business development, I mean, it's still slow, but it's starting to come back a little bit higher than we had seen, but certainly nowhere near where we were into 2019.

But it's going to depend on the sort of the pace of the sort of normalization of the environment. We saw in Europe and Asia Pac region for us earlier in the third quarter when those businesses were going back to the office at a little more accelerated pace, client activity, and client interaction, I should say, not activity, but client interaction was a more normalized level, we start to see some pick up in those expenses.

But ultimately, look, I think long term, we would expect there to be some residual effects and benefits of learning to live in this sort of remote and virtual world. But it's going to depend on the region. It's going to depend on clients.

But ultimately, clients are getting more comfortable and have become more comfortable executing in this environment. So there definitely should be some efficiencies.

Exactly how that plays out at what pace, it's going to depend. But it's important to remember as well that, look, we're a face-to-face business, right? It's face-to-face is critical in creative deal environments during complex negotiations and certainly relationship building.

So I would expect it to come back, probably not to the level that we were at in '19 that quickly. But I expect that to have some residual benefit going out a couple of years as we think about it.

And then look, outside of that, there's all the longer-term implications on real estate and other areas where, as we move into a more flexible working environment, which is what we at Lazard are sort of thinking through and how to work with our employees to figure out what is best, not only for our employees, also for our clients, sort of balancing the two.

I would think that's going to take several years to really see through in the non-comp expenses. But I think over time, if you start thinking out the next couple of two to four years, I think we could see the paradigm moving towards a more flexible working environment and therefore, the needs and type of space or redesign, reimagining the space we have going to change.

Exactly what that means in terms of an expense change, I think it's a little too early, it's TBD. We're in the early phases of thinking about this strategically.

But I think, as we've said before, I think long term, we want to take the best of what we've learned in this environment and figure out how to apply that and bring it forward with us as we sort of evolve to the future on a post-pandemic world.

We will now move to our next question from Brennan Hawken from UBS.

First, just as a cleanup, you guys gave some great color on M&A and restructuring. But were there any pull forward revenues from October in the 3Q number?

Yes. Look, pull forward for us, but we don't disclose the actual number. At this point, Brennan, I think this is more regular way. There's some transactions that closed in the beginning of Q3 that go into our Q2 numbers.

There are some transactions that closed in the beginning of Q4 that will go in our Q3 numbers. The difference really isn't material. It's sort of a regular way at this point in time. But there was nothing sort of out of the ordinary in that respect.

Okay. Great. Then when we think about the asset management fee rates, 3Q was a little bit softer than we were looking forward, given sort of strength in equity markets.

You guys spoke a little bit about demand dynamics and some shifting of allocations, which seem to suggest that, that would make the third quarter fee rate a reasonably good one to use as a jumping off point?

I just want to confirm that that's the case or whether or not there was any noise in the fee rate?

And based upon what you're looking at as far as the pipeline goes, which as you talked about, has really strengthened? And you're much more optimistic about the flows going forward? How should we think about the fee rate in that pipeline and how that might impact the fee rate going forward?

Yes. So Brennan, on fee rate, as we called out, look, a lot of this, as we said historically, we sort of expected to see this as the majority of it is really relating to the business mix.

So moving from some of the higher fee categories, such as emerging markets, being a smaller percentage of our portfolio relative to quant and fixed income and some other areas, which are lower fee general strategies.

And so that really is the reason for the decline. I think that the majority of that decline. Look, there's always some fee pressure in our business, as we always know, we continue to innovate, which is the most important thing we can do in our business coming up with new products, launching new teams and new strategies across the platform.

I think going forward, yes, I think it's a reasonable sort of assumption to start using. It's going to move around, as it has. It'll go up and down a little bit based on that business mix going forward.

But ultimately, I don't think there's anything strange in that number specifically this quarter.

Okay. And then in the Asset Management business, consolidation remains a theme, we see just a steady drumbeat of not only activity but pressure from activists, indications from CEOs of large diversified financial services firms looking to add scale to their businesses.

You are of reasonable size in that business, but not huge. So how are you thinking about it? It really could go either way. I could see you guys using Asset Management and the excess capital that you generate in your business to go out and pursue more aggressively bolt-on transactions, given the pressure that the business is under and the fact that smaller firms really are struggling more than ever and need to partner with a firm that has good distribution capabilities and the like.

And then on the other end, of course, there are strategic alternatives as a seller. How are you all thinking about balancing those two right now? And how are you thinking about executing on that environment going forward from here, at least in the medium term?

Sure. Great question. Look, it's a fascinating environment. It's probably a consequence of all the changes that have taken place around Asset Management over the last several years. And firms and companies and people are reacting to that now. From our standpoint, we have a great franchise, a great business that we've been investing in historically, and we see an enormous opportunity to continue to invest in the business now.

Just in this quarter alone, as an example, which I think is really a reflection of what this environment is like right now. We brought on three new teams: Coherence Capital, which is a credit team; Bottom Billions, which is a thematic team that complements our emerging market franchise; and a digital health strategy that complements our global thematic platform.

So that's just an illustration of the opportunity set that's out there, and there's many more behind that. We've been pretty active over the last several months or so, although it's accelerating right now.

And it just reflects the fact that, as you said, there are a lot of challenges for smaller- and medium-sized platforms given the pressures around compliance, the pressures around cyber, the pressures around scaling to sell product, the gatekeepers who become more sophisticated for products.

So having a more sophisticated platform or a more global platform to be able to distribute through becomes quite attractive, and that creates a lot of opportunities for us in that landscape.

I think that we're going to be very thoughtful about the kinds of bolt-on larger transactions. We have to make sure that if we do something, it's adding to the value of the firm.

And it also has to be something which we think is a healthy business. It's hard to fix businesses that are broken in asset management.

And finally, the larger consolidations, look, those are things which as a steward of shareholder value, we always have to consider for both our businesses.

And at the same time, we're very comfortable with this mix of businesses and the two platforms today.

We'll now take our next question from Gautam Sawant from Crédit Suisse.

I just wanted to follow-up on that last question. On your alternatives platform, are you seeing additional demand for firms to join that platform? And what is the outlook to be able to bring on, I guess, firms there and to help improve the fee rate with those firms coming on?

That's exactly what I was talking about in the last question. We're seeing increased opportunity to bring on firms onto that platform. As I said, we brought on three this quarter alone.

I think we've done five or six in the last year total. And our guess is, we'll continue to see more activity there. Look, there's a lot of disarray in that market right now, and that is an opportunity for us, but you have to sift through and make sure that the strategies we're bringing on are ones that we can be successful with, it's nice if they come with some assets, which increasingly we've been able to do to make the economics more attractive. But we're seeing an increased flow there, and that's something we're very focused on.

And just as my follow-up, on the Sovereign Advisory business, can you talk to how demand is picking up in different regions there? And how are you positioned to continue winning business? And how does that help drive further business in these different regions?

Well, I mean, this has, obviously, been a very strong platform for Lazard historically and continues to be today. I think it's easy to say that we have the leading platform in the world in this area. And we're involved in virtually all of the major assignments that are taking place in the market today.

It's an area where -- unfortunately, the pandemic is having a disproportional effect on many of the developing countries around the world, which is putting pressure on their economies.

And as a result of that, pressure on their balance sheets of these countries, and that's going to drive increasing restructuring in the future. And I think that's an area where we're highly focused and have a highly experienced team and should continue to do reasonably well over time.

We will now take our next question from Steven Chubak from Wolfe Research.

Brendan O'Brien; Wolfe Research, LLC^ This is Brendan O'Brien filling in for Steven. So you guys already touched on this a bit earlier. But Europe has, obviously, been about a month or two ahead of the U.S. in terms of COVID cases and lockdowns.

How have dialogues sort of changed with CEOs and Boardrooms in Europe over the last month, as cases have sort of picked back up and lockdowns have become more? And then what is sort of the appetite for deals to get done or announced as they're now headed back into lockdown?

I'm not sure that much has changed over the course of the last month in terms of dialogue with CEOs in Europe. The dialogues continue at pace. Deal activity through the last month has been consistent.

We haven't seen the very sharp drop-off that we saw in March and April. In fact, in a couple of markets, we've seen some acceleration over the course of the last month or so.

I think it remains to be seen what happens over the next couple of months, as the lockdowns have gotten more severe in a couple of countries. So we're keeping an eye on that.

The cross-border activity, I think, hasn't been as robust. Cross-border Transatlantic and also, obviously, from China, hasn't been as robust as it's been in the past.

I think a lot of that in the cross border into the U.S. has been impacted by elections and political climate in the U.S. And obviously, tensions between China and the U.S. has probably limited a lot of that deal activity as well.

But in the European midsize, which is a lot of the financial sponsor activity, in the sectors that I referred to earlier, you continue to see a reasonable amount of activity in Europe right now.

Brendan O'Brien; Wolfe Research, LLC^ Great. I guess sort of another follow-up. You just mentioned tax codes have changed and things of that nature. I guess, first, what would be the impact of sort of a higher foreign minimum tax rate in the U.S.? You guys obviously benefited the least on the way down.

So would it sort of be a similar, not as big of an impact on the way back up? And also, how much of the title sponsor activity do you feel sort of a pull forward from a potential change in the capital gains and taxes?

On the financial sponsor, let me take that and the tax rate impact on us, I'll let Evan take. Financial sponsor activity, there seems to be a pickup in activity around the fourth quarter trying to get some deals closed prior to year-end.

That seems to have picked up over the last, I'd say, several weeks or so. My guess is that's a positive blip, but probably doesn't change the overall dynamics of the financial sponsor market that much because it's such a robust market at the moment. And Evan, you want to take the other?

Yes, sure. So yes, I think, as you pointed out, I think we would be a beneficiary on a relative basis, certainly, of tax reform where U.S. tax rates goes up.

Obviously, the devil is going to be in the details there, and we don't really have a lot of information other than sort of a theoretical, maybe something might happen, depending on what happens next week and a lot of questions and a lot of maybes at this point in time.

But yes, I would think there's an overall sort of 60,000 foot view, I certainly would take the view that if U.S. tax rates go up, we'd certainly be a relative beneficiary of it, given our current beneficial structure.

We will now take our next question from Jeffery Harte from Piper Sandler.

Couple of cleanups for me. As far as the diluted share count, I think, last quarter, you guys are talking about 4Q '20 being something close to 4Q '19, but it didn't change a whole lot this quarter. Should we still be expecting a big increase next quarter?

Yes. Look, I think it drifted up a little bit this quarter, Jeff. And I think our expectations would be that we're going to end the year somewhere in the same range as we ended Q4 '19.

So I think that still holds today, given that we bought back all the dilution we needed for year-end compensation earlier this year. And so effectively took the share count down, but ultimately drifting back up through the course of this year to last year's level. So essentially, we've kept our share count flat year-over-year.

Okay. And in Asset Management, as we're looking at kind of the flow outlook, despite the obvious month-to-month volatility, I tend to think of institutional as being more stable directionally kind of historically. It took a while for the outflows to work their way through the system.

Now that we've reverted back to inflows again, should we expect kind of a similar persistent, takes a while for the inflows to work their way through?

Well, I'd say institutional business, as we've always said, right, it's a bit lumpy. You're going to get some times where things are going to come and sometimes where they'll slow down.

I think, ultimately, we're very focused and seeing a lot of great fund flows for us and mandate wins that we've had over the last few months that are sort of driving in towards growing our gross inflows for the quarter.

Our gross inflows continue to be strong this quarter. Gross inflows are certainly very, very important to us on a quarter-to-quarter basis, it says that we've got the right product, it says we've got the right teams, the portfolio management teams and the products are really working their way through.

So I think this quarter, you kind of saw two themes here. You had gross inflows or the inflow part of the equation going up because of some of those unfunded mandates.

And Jeff, as you pointed out, our gross outflow is actually coming down on a relative basis. You always have some ins and outs. And this time, I think we benefited on both sides of the curve with stronger gross inflows and lowering gross outflows at the same time.

So I think our outlook, as we've said, we continue to be optimistic, given what we've seen and the wins we've had, the wins we're continuing to get, the unfunded pipeline which remains fairly strong and quite diversified at this point.

So I think our products are selling well in the market. I think clients and our potential clients are certainly eager to put some money to work in strategies like ours, and they're really seeing the value of active management today in today's market more than they have in the past.

So I think all those factors sort of come together, to kind of say, look, hopefully, it's lumpy. We can get some potential months and quarters where it could turn, but I think we feel pretty good about the business today relative to the last couple of years.

Okay. I feel kind of weird asking this close to the end of a recession as we are, but it stands out. Cash is building on the balance sheet and the environment outlook is getting quite a bit better and improving, at what point do you consider kind of reinstating a more meaningful buyback or potential dividend increase or something along those lines?

Yes. Sure. Look, as you point out, Jeff, our cash has been building. We know that happens through the year. We accrue cash at this point as we start to gear up for sort of year-end compensation and also for potentially repurchasing shares to offset any dilution which we normally do at the beginning of the calendar year, so beginning of 2021.

Look, we've been a little bit more prudent in this market to be a little more conservative in this environment, given a little bit of the uncertainty. So we're letting cash grow a little bit. Ultimately, I think our view is we bought back the number of shares we needed, the minimum amount of shares we wanted to offset the dilution this year. We did it in Q1. We bought the shares back when the market sold off in late Q1. So we did enough to buy back what we needed for the year.

Ultimately, I think we're holding on to the excess cash. Any future additional repurchases will come from excess cash generation. So it's going to be depending on the pace and the outlook of the business.

So we're going to keep monitoring it. But ultimately, it's likely to be limiting for the rest of this year. But I would expect, Jeff, in 2021, if we're heading back to a more normalized environment, if the business continues to strengthen, I would expect us to sort of resume our share repurchases at that point in time in 2021.

As there are no further questions, this now concludes the Lazard conference call. Thank you for your participation. You may now disconnect.