Lazard Inc (LAZ) 2009 Q4 法說會逐字稿

Good morning and welcome to the Lazard fourth quarter and full year 2009 earnings conference call. This call is being recorded. At this time all participants are in a listen-only mode. Following the remarks, we will conduct a question-and-answer session. Instructions will be provided at that time. (Operator Instructions). At this time, I will turn the call over to Judi Frost Mackey, Lazard's Director of Global Communications. Please go ahead.

Good morning and thank you for joining this conference call to review Lazard's results for the fourth quarter and full year of 2009. Participating on the call today are Lazard's Chairman and Chief Executive Officer, Kenneth Jacobs, and Chief Financial Officer, Michael Castellano. A replay of this call will be available on our website, www.lazard.com beginning today after 1:00 PM. Today's call may contain forward-looking statements. These statements are based on our current expectations about future events and are subject to known and unknown risks. uncertainties, and assumptions. 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. These factors include, but are not limited to, those discussed in Lazard's filings with the Securities and Exchange Commission, including our annual report on form 10K, quarterly reports on form 10-Q and current reports on form 8-K.

Lazard assumes no responsibility for the accuracy or completeness of any of these forward-looking statements. Investors should not rely upon forward-looking statements as predictions of future events. Lazard is under no duty to update any of these forward-looking statements after the date on which they are made. Today's discussion may also include certain non-GAAP financial measures. A description of these non-GAAP financial measures and their reconciliation to the comparable GAAP measures are contained in our earnings release, which has been filed with the SEC, and our current report on form 8-K. For today's call we will focus on highlights of our performance. The details of our earnings can be found in our press release issued this morning and our investor presentation, both of which are posted on our website. Ken and Mike will be happy to answer your questions following their remarks. I will now turn the call over to our Chairman and Chief Executive Officer, Ken Jacobs.

Good morning, everyone, and thank you for joining our call. During my first two months as Chairman and CEO I have had a chance to spend time with many of our clients and partners worldwide, in both the Financial Advisory and Asset Management businesses. Lazard is better positioned today in its two core businesses, Financial Advisory and Asset Management, than at any time in my 22 years at the firm. We ended 2009 with the third strongest quarter of operating revenues in our history. Operating revenues for the second half or 2009 were up 40% over revenues for the first half the 2009. Operating revenues for the year were down just 3%. Financial Advisory revenue was up 24% for the fourth quarter of 2009 over the fourth quarter of 2008. And was down just 3% for the year. Financial Advisory revenue for the second half of 2009 was up 38% over revenue for the first half of 2009.

While M&A was down 35% for the year during one of the weakest M&A environments in history,M&A in the fourth quarter increased 37% over the third quarter of 2009. We captured M&A market share throughout the year. Our global restructuring business had a record year, up over 200%. Asset Management revenues increased 63% for the fourth quarter of 2009 over the fourth quarter of 2008. Assets under management at year-end increased 42% to $130 billion, up from $91 billion a year earlier. Management fees for the fourth quarter were up 42% over that same period. We had near record inflows of more than $10 billion for the year. Few long only equity asset management firms can demonstrate such a performance for 2009. Our globally diversified asset management business is positioned well for 2010. So, why are we in such a strong position today.

This is testament to the success of our strategy and the strength of our model. Lazard strategy is simple and powerful. It is built around two businesses, Financial Advisory and Asset Management. Both generate returns from intellectual capital not financial capital. We take no risks that could threaten our firm. Success in each business enhances the Lazard brand, but then enables the firm to compete on equal footing with firms many, many times our size without the commensurate reliance on and the inherent risks and conflicts associated with capital. Lazard is a global business. Our historical position, our ongoing investments in both our businesses, both currently and in previous cycles, give us the scale to compete against our largest competitors, again, on a global basis and distinguish us from the Financial Advisory boutiques. Lazard's model is tested and resilient.

Our largest competitors will need to adjust and reinvent their business models to adapt to the changing financial and regulatory environment. Our smaller competitors are trying to anticipate and develop the models and culture necessary to thrive as they grow. During this period of turmoil, as in previous ones, we stayed focused and direct our energies on providing great advice to our Financial Advisory clients and investment solutions to our Asset Management clients. Lazard's growth will come again from our core businesses, which we have grown successfully over previous cycles. Opportunities for growth in our two core businesses are substantial. Some of that growth will come naturally from a recovery of the financial markets and the economy globally. The breadth of our franchise should position us well to capitalize on that recovery.

Additional growth will come, continue to come from investing in our businesses through the hiring of bankers and Asset Management professionals to compliment the already deep and experienced team. The stability of our platform and some of the changes to our compensation policies, which are detailed later, give us significant advantages in attracting top bankers and Asset Management professionals. The substantial existing scale of our platform allows us to be discerning about both the pace and the quality of the hires we make going forward. Lazard's financial model, historical position, investments over the last cycle should provide substantial operating leverage to our shareholders as the new cycle commences. We are entering this cycle with both our core businesses showing significant momentum. We are positioned to capitalize on our ongoing investments, an historically strong position we enjoy in the markets in which we compete. And we enter 2010 with what we believe is the most competitive model in the industry.

As you have seen in our earnings release, our net results for the 2009 fourth quarter and year were impacted negatively by special charges and changes to our compensation policies. Mike will discuss the special charges and changes in policy in detail following my remarks. I firmly believe that taking these special charges and making these changes to our compensation policies are the right thing to do at this moment in time. We expect the charges and changes to our compensation policies to enhance the competitiveness of our model and position us to drive shareholder value. Key to achieving these objectives for our shareholders will be our discipline in the compensation process going forward. We are committed to growing annual compensation expense at a slower rate than revenues and to achieve over the coming cycle compensation levels on average consistent with the targets we established when we went public in 2005.

Well, it may not be immediately apparent from our GAAP numbers, we have in fact held aggregate 2009 current cash compensation plus deferrals awarded during the 2009 compensation cycle in line with 2006 and 2008 levels. There is quite a bit of detail on pages 17 and 18 of our earnings release, which will enable shareholders to better understand our compensation and benefit expenses, the special charges, and the changes in our policies. Mike will now comment in more detail on our results and will highlight some of our business activities.

Thank you, Ken. First I would like to point out a few additional highlights. As Ken'd mentioned this morning, we reported strong operating revenue across all business lines. However, the net results were negatively impacted by significant special charges in the fourth quarter related to compensation and changes in our compensation policies. As a result, on a U.S. GAAP basis we reported a net loss of $1.64 per share in the fourth quarter and $1.68 per share for the full year. And on a fully exchanged basis before the special charges we reported a net loss per share of $0.46 for the quarter and net income per share of $0.09 for the full year. Each quarter in 2009 beginning with the second we demonstrated continued momentum, rebounding from the lows of the first quarter. Since then and in each quarter total operating revenue significantly increased over the prior quarter and, as Ken mentioned, in the fourth quarter our 2009 operating revenue was the high, third highest quarterly revenue in our history.

In Financial Advisory operating revenue from the quarter for our M&A and strategic advisory, as well as our capital markets advisory activities, was $314 million, the highest level since the fourth quarter of 2007. We continue to advise financial advisory clients on complex global M&A and other strategic transactions. Our earnings release includes a number of these transactions completed during the quarter, as well as those that are still pending. These include Barclays' $13.5 sale of its BGI business to BlackRock. Resolution's GBP1.9 billion acquisition of Friends Provident. Anheuser-Busch InBev's disposition of several of its noncore assets following their merger. And most recently Kraft's pending acquisition of Cadbury. Operating revenue for our restructuring activity was $103 million in the quarter and its restructuring activity remains at relatively high levels globally.

As Ken mentioned, our Asset Management business reported another outstanding quarter, with nearly $5 billion of net inflows for the quarter and a 15% sequential increase in management fee revenue over the third quarter of 2009. We also had a strong quarter for performance incentive fees with $41 million, bringing the full year total to $75 million, which is more than twice the incentive fees for the full year of 2008. In 2008 and throughout 2009 we commented that incentive fees were primarily from traditional long only strategies. And while the fourth quarter included incentive fees from these strategies, we also had $24 million in performance fees from alternative strategies, up from the $5 million we that reported in the fourth quarter of 2008. Now turning to compensation expense. As detailed beginning on page eight of our earnings release, during the fourth quarter of 2009, we have taken special charges and as part of our 2009 compensation cycle, we have changed our compensation policies.

On pages 17 and 18 of the release you will find additional detailed statistical information, which we believe will be useful to understanding our compensation expense. First, we incurred a previously announced charge of $86.5 million for the accelerated amortization of restricted stock units previously granted to our former Chairman and CEO who passed away in October. We are also accelerating the vesting of deferred cash incentive compensation that was awarded as part of the 2008 compensation cycle. The acceleration resulted in a noncash special charge of $60.5 million in the fourth quarter of 2009 and therefore will serve to reduce our noncash expenses in 2010 and in future years. As part of our year-end incentive compensation process, we changed the mix of cash and deferrals from the mix followed in 2008 to be in line with the practices followed in 2006 and 2007.

This change increased the current cash and increased the deferred equity components of the incentive comp and we eliminated the deferred cash component. While the economic cost is the same regardless of mix, this year's change in mix increased our compensation ratio by approximately 900 basis points. We have also taken additional steps in the first quarter of 2010. First, we have implemented selective staff reductions. We therefore expect to take a charge, a pretax charge in the first quarter of 2010 of approximately $90 million, including a noncash component of $41 million relating to restricted stock units previously granted to individuals who were being terminated. Second, we are continuing to hire senior talent and to redeploy our human capital to areas where we see high potential for business growth. And finally, we amended a previously approved retirement policy, which accelerates the accounting for deferred stock awards and will result in a noncash pretax charge of $24.8 million in the first quarter.

We enter 2010 with a base compensation of approximately $1.060 billion, 1060. This assumes current pay levels, no staffing increases, no changes in the mix between current and deferred compensation. We all know all those things could change. As Ken mentioned, our goal is for annual compensation expense to grow at a slower rate than revenues, in order to achieve over the cycle compensation levels on average consistent with the targets we established when we went public in 2005. We would expect that any increase in compensation will be a combination of cash and equity based. Therefore, under U.S. GAAP, compensation expense in the current year would only include the cash component for the increased revenue. I also want to say a few words about noncomp expenses. As you know, an important measure we follow is the ratio of noncomp expenses to operating revenue.

The fourth quarter 2009 ratio decreased to 19% from the 21% in the fourth quarter of 2008 and decreased to 20% -- oh, I'm sorry, and compared to 20% in the third quarter of 2009. The full year ratio for 2009 decreased to 21% from 22% in 2008. While noncompensation expenses were down 11% for the full year, we saw an uptick in the fourth quarter to $102 million from $83 million in the fourth quarter of 2008 and from $88 million in the third quarter of 2009. The fourth quarter increase was driven primarily by increased business activity, as reflected in higher marketing and business development expenses and professional fees. The increase in assets under management also contributed to the increase in fund administration and out sourced services. As Ken mentioned, we are well positioned as we enter 2010. We continue to maintain a strong liquidity position, with over $1.1 billion at the end of the year in cash and U.S. Government and Agency securities and marketable equitable securities.

Our business is continue to generate significant cash flow and we have no scheduled debt maturities until 2015. I will now turn the call back over to Ken to summarize and we will be happy then to take your questions.

Thank you, Mike. As a preface to the Q&A, I would like to share with you two questions I have been thinking a lot about. First, how are we positioned as a firm going into this cycle versus previous cycles. Second, how are we going to grow and drive shareholder value position. And second, how are we going to grow and drive shareholder value? Competitively, our position has never been stronger. Our larger competitors, while benefiting from the improvement in the financial environment, are struggling to adapt their business models to the changes in markets and likely regulatory reforms resulting from last year's financial crisis. Our smaller competitors are investing heavily to build out geographies and industry groups. If history is any guide, scaling boutiques into a global platform like Lazard is difficult.

On the Financial Advisory side of our business, the demand for advice from independent financial advisory firms has never been stronger. Ours is the only independent platform that is built out globally across all major industry groups, with a deep and experienced team. On the Asset Management side of our business, we enter this cycle with strong momentum. We have never had a broader set of offerings and investment solutions for our clients. Assets under management are near record levels and inflows were exceptionally strong in 2009. The investments we made in diversifying our Asset Management business in the last cycle should hold us in good stead for the future. Second, how will we grow and drive shareholder value. We will drive shareholder value as long as we grow revenues at a faster pace then either our annual compensation or noncompensation expenses over the cycle.

We can achieve that result by maintaining significant employee ownership and by being financially disciplined in the way we run the firm. Growth will come from the investments we make in people and businesses, as well as the natural progression of the business cycle. With regard to investment, we need to recognize that this is a cyclical business and it is always best to be investing counter cyclically. Year to year performance is difficult to predict, so our goal has to be to enter and exit each cycle significantly stronger than we were in the previous cycle. The competitive environment we face today as we enter the next cycle is probably more favorable to us than at any other time and particularly coming out of the trough in 2002. Over the last cycle, we grew Financial Advisory revenues from the peak in 2000 to the peak in 2007 by 62%, far out stripping the 7% growth in M&A volume and the 30% growth in the global markets.

From the trough in 2002 until what appears to be the trough in 2009, we grew Financial Advisory revenues by 86%, again far outstripping the 26% growth in M&A volume and the 47% growth in the global markets. We did this during past cycles by entering new businesses like restructuring at the peak of the cycle and investing in M&A and rejuvenating our Asset Management franchise at the trough of the cycle. The investments we are making that prepare us for the next cycle include the continued buildout of our Asset Management platform and increasing the breath and depth of our Financial Advisory platform. As an example, these investments include a capital structure advisory effort to help governments and corporations come to grips with the significant deleveraging that is unfolding throughout the world.

This effort compliments our market leading M&A and restructuring franchises and is an increasingly important part of our business and one we will be speaking about more in the months to come. We are entering 2010 with great momentum in both our businesses, which is reflected in our revenue performance for the second half of 2009 and in our strong market position. Finally, before turning over this call to your questions, I would like to make a short comment about Bruce Wasserstein. Bruce left us a great legacy. He energized the firm, built its spirit, retained and attracted outstanding talent in both the Financial Advisory and Asset Management businesses and integrated a collection of good businesses into a great firm. Thank you, Mike. Thank you. Mike and I will now be happy to take your questions.

(Operator Instructions). Our first question comes from Patrick Davitt with Merrill Lynch, go ahead, sir.

Good morning. You mentioned a target of getting, I guess, getting back to the compensation ratio that you had targeted when you went public. Are you comfortable kind of giving a range, like assuming revenues stay around where they are, where you are pretty comfortable you could fall in 2010.

I think -- good morning, Patrick, this is Mike. I think at this stage no one has got a crystal ball as to what revenues might look at, what the environment might look like, et cetera. But, maybe I could try to address your question with a little bit of a mathematical exercise.

Okay.

And I think you will also find a little help in developing your models in one of the charts that we are going to include in the web presentation, sort of give a sensitivity of revenue growth versus what that might mean in terms of compensation. But we have indicated in the release that we enter into 2010 with $1.060 billion of compensation for at least the current employee group. And of course we do intend to hirer people opportunistically. And we certainly are in an environment where we would expect revenues to be growing. But if one were to say, what would it take mathematically to get back to a range that we talked about at the IPO. At 1060, with a growth in revenue, I'm sorry, with a growth in comp slower than revenue, if you just were to hypothetically assume maybe 50% of that going to comp and recognizing or expecting that, at least in 2009, if the split was 63% equities and 37%, try 63% cash 37% equity, only a portion of that increase in notional comp would hit the US GAAP numbers.

Yes, you could sort of get back to a mathematical calculation that we said is something like a $2 billion plus range, you could be close where we were. But again, who knows what the market environment looked like. What I would say, though, is that we've provided a lot of information on page 17 and 18 of the release. To give you an idea of what our compensation structure has looked like, both on a U.S. GAAP basis and on a notional GAAP basis. Notional being at the end of the year what do you tell people they earned. You got cash, you got equity. And we all know US GAAP pushes that equity expense out into future years. So we have tried to provide more clarity as to what compensation structures have been in the past, what they were for 2009 and part of what we are saying with that is that while I am not going to say what our ratio might be with any specificity, we are going to provide information like this so you can judge have we followed that discipline that Ken mentioned we need to have to grow compensation at a rate slower than revenue.

Okay. And just quickly I want to confirm that you do not expect to be subjected to the UK bonus tax.

That is correct. Right, okay. You didn't mention the capital markets line much in your comments. We saw pretty nice growth there. Can you speak to maybe the efforts your making in growing that business and remind us how it works in terms of its relationship with Lazard Capital Markets.

Okay, this is Ken. Let me comment on it, first comment on it and then I will turn it to Mike. Broadly speaking our capital markets effort falls under what I described earlier as our efforts in the capital structure advisory area.

Right, okay.

Okay. And when I think about that business there again are two parts to it. One, the advice we are giving and then the second is how we get paid. And what we are increasingly finding is that there is a demand for this advice and we are increasingly finding that we can get paid in multiple ways, as a fee stream that is advisory fees or alternatively as participating in offerings. And that is important because that is a very profitable way for this firm to take advantage of this great level of expertise we have in this area.

And is there a relationship with the sales and trading and research aspects of Lazard Capital Markets or not.

Yes, we have a business alliance with them and we actually originate.

Right.

And the private Company, Lazard Capital Markets, underwrites, takes all the risk, and distributes.

Okay, perfect.

We are not incurring the risk of any of the underwritings that are taking place there.

Okay, great. And just finally, could you update us on the wealth management buildout and where that stands and how it is going.

Look, that's a new initiative for us. It falls under the umbrella of our Asset Management area. We continue to see opportunities. It is one of the several areas within the firm w Where we identified opportunities for growth.

Okay. All right, thanks a lot.

Our next question comes from Michael Hecht with JMP Securities, go right ahead.

Hi, guys, good morning. How are you doing. Morning, Mike. I just thought maybe first a big picture question on strategy for Ken. Just maybe talk a little bit about any changes you foresee to the firm strategy within Financial Advisory or Asset Management. Clearly, he pointed to a lot of things that are working very well at Lazard. But surely there must be a few areas you would like to further bolster your progress in.

Frankly, the wonderful thing about Lazard is it is pretty simple. The strategy is also pretty simple. It is pretty resilient and it has been tested by time. I, frankly, don't think there is a lot to do or there is a need to do much with regard to the core strategy. I think the opportunities in our two core businesses, Financial Advisory, Asset Management, are really substantial. I think they come about as a result of some of the disarray in the markets, changes at some of the larger firms. What we are going to keep a careful eye on is opportunities to hire. We are going to do it in a, as I said, in a disciplined way. And we can afford to be disciplined, because I think our platform is pretty built out at the moment and so we can really be careful about making sure we are doing things which are really additive and I think we are going to find substantial opportunities to do that over the coming months and years.

Okay, that is fair. And then on the capital management philosophy, the $1.1 billion of liquidity you point to. Certainly seems prudent in this day and age, but just want to reconcile that versus the fact that Lazard's businesses are not terribly capital intensive. So just help us think about the priorities between buybacks, dividends or acquisitions and in particular how that might contrast with prior management.

Right. Well, look, the last couple of years have been really a pretty unusual period of time for the financial markets and I think it really paid to have a very conservative balance sheet during that period of time. We're pretty expert -- we would like to think of ourselves as fairly expert when it comes time to thinking about capital structure and how we use our capital and such. And so we are going to take a careful look at the capital management. The mix between what we keep in cash, pay down a debt, and importantly, very importantly share repurchase. That is going to be something we are going to carefully think about over the next several months.

Okay, that's fair. And then just within the Financial Advisory business, you ended the core, I know, at about 146 MDs. Where did you end '09 and what are you guys budgeting for '06? Any sectors or geographies you are targeting there.

My guess is the MD count will come down a bit as a result of some of the changes we've made in staffing at the end of this year, which I think is a healthy thing to do. But that doesn't mean we're -- but also, we are going to be continuing to recruit as we see opportunities in the marketplace. It is really a shift in making sure that we have got the best possible people on this platform, which I think we do. Our priorities. Look, I think we can be, again as I said, I think we can be pretty discerning about where we hire. Clearly, we want to continue to build out the Asset Management business, because we've really got a nice track record and good performance across a range of products. So taking advantage of that is one our priorities at the moment. And on the banging side, when I look at the franchise, senior bankers who can make a difference, we will always hire them.

Right, okay, that's fair. Then just last one for me to follow-up and I will get back in queue. But just so -- then it sounds like on the Financial Advisory side the focus will be more on productivity. And if I kind of calculate rough numbers, productivity per MD was maybe around $6.5 million for full year '09 versus a peak of more than $9 million in '07. Do you expect upside from '09 levels as we head into 2010.

Oh, yes. I think that, frankly, if we get a recovery in the M&A business between what looks like a reasonably stable restructuring business, a recovery in the M&A business, and potentially some success in this capital structure advisory effort, which I anticipate, you should see some productivity gains. We saw that in the last cycle very substantially, so I wouldn't be surprised if we see it here as well.

Okay, great, that's helpful.

So we should be a mix. Look, as I said in my comments, it is going to be a mix of the leverage we get off of having a scale platform, plus incremental hiring's where they really make a difference. Should be able to drive significant value to shareholders here.

Great. Thanks a lot.

(Operator Instructions). Our next question comes from Daniel Harris with Goldman Sachs, go ahead.

Hi, good morning, guys.

Hi, Dan.

I was hoping you could just sort of flesh out a little bit more the rational behind changing the mix of the compensation. You've done it, I guess, now twice in two years, getting back to where you were before. Was that pressure internally from employees. Was that something else to remain competitive externally. How do you think, how should we be thinking about that going forward.

Look, this is, in my mind this is playing offense not defense. When I look at the outside world and I think of what is driving people with regard to their compensation policies, particularly amongst the large firms, the factors that are in play there really aren't applicable to us. I mean, this firm is driven by intellectual capital not financial capital. When you have financial capital, you not only have to get a return for the capital, thus some of the policies that we have seen, thus the share -- the different sharing of compensation between the capital and the employees, but more importantly when you have a capital intensive firm you really have to think about when the capital is getting paid back and what the return on capital is going to be and I think that gets to the heart of the suggested magnitude of the deferrals and also the claw backs. We are in a different business. Compared to the large firms where in many instances 90%, 95% of the revenues are associated with capital and only 5% or 10% is associated with the advisory business.

Our business is all advisory, all advisory revenues, whether it is on the Financial Advisory side or the Asset Management side. So when you think about we don't have this disparity between risk and capital that the other firms are addressing. And then second of all, on our platform it is a real advantage, I think, today to have a mix which is more reasonable from the stand point of attracting people and, frankly speaking, with regard to retaining people. When you are paying huge amounts in terms of deferrals with claw backs associated with it, I just don't think you are getting 100 cents on the $1.00 in terms of what you are paying people. So frankly speaking we have been able to, I think, withstand some of the pressure around pay this year by making a more attractive mix, which from an economic stand point has to be a benefit to shareholders over the long run.

Okay, fair enough. And does that -- does the changes you guys made this quarter, this is just sort of a nit picking, on the balance sheet the accrued camp looks likes it a vastly different number than anything we have seen. Is that just timing or changes. How do we think about that.

That becomes a natural result of the change we made in the fourth quarter of going from a model last year that had, and you can see the percentages on page 17 of the release, where you had roughly 40% of year-end comp being paid in cash and 60% in equity. Where as this year it is basically a little bit flipped. It is 63% in cash, 37% in equity. So you just end up having with a higher current compensation payable.

Okay.

Daniel, one more comment on this which I forgot to mention is that we are still targeting very significant equity towards our senior people where it is valued most highly by them and also most valuable to the franchise in terms of retention. And I think that is important is that where are you going to get your biggest bang for the buck on providing deferrals and equity are going be the people who most value it.

Okay, that's fair. Moving over to the M&A front, I was wondering can you guys comment a little bit on any of the impact on the backlog or your conversations that you have been having with clients with regards to different changes in the regulatory environment that's been happening in the U.S. or even overseas. And how you think CEOs are feeling about that just in general the changes there and then to some extent whether or not that's impacting their decisions to move ahead or not move ahead with M&A activity.

Okay, let me touch on that. And I'll start in the general and try to be a little specific about industries. Look, from my experience, M&A is fundamentally driven by three factors -- optimism; financing; and valuation. There are others, but those three jumped to the forefront in my mind. Clearly where we sit today people are more optimistic than they were a year ago. With regard to financing, it is obviously better today again than it was a year ago. Valuation, on the other hand, I still think is pretty uncertain because there is a real divergence of opinion in the market about what exactly is going on with the economy, not only short-term but medium and longer term. And so I think you are seeing more discussion, more activity, clearly than was the case a year ago, but I am not sure you see a burst of activity until some of these questions around valuation get resolved. And clearly there is more sentiment moving in a, perhaps, a more positive way now then there was six months or nine months ago, but it is still a bit uncertain.

So, that's sort of the first comment, general. Second comment, industries. You have to look really industry by industry to see the real picture. And the financial services industry is going through a revolution, no other way to put it, both in terms of deleveraging, capital raising and very importantly in terms of asset dispositions. I'm not sure the statistic exactly today, but our financial services people, which I think are led by Gary Poris, one of the best teams on the street, believe that there is several hundred billion dollars worth of assets for sale right now. That doesn't mean all those deals are getting done or they will ever get done, because it is not clear there is capital out there to buy every one of these assets. But there is potentially an enormous amount of activity in the financial service sector over time. Then you look at what is going on in the United States, in particular, and again this is the trend in financial services is really a global trend.

But the effect of the first year of the President's agenda in Congress, healthcare, energy, in particular, have to some extent frozen M&A activity in both of those industries. And I think we are going to see a thaw in that this year as a result of some of the resolution of the concerns about where healthcare comes out and also what is going to happen with regard to energy. And those are two very important sectors. So if you take financial services, which is a big sector, healthcare, energy, I think as some of these issues around capital and then importantly some of the legislative agenda gets somewhat clearer, I think we are likely to see a bit more activity as well.

That was great. Thanks a lot guys and good luck in the new role.

Thank you.

Our next question comes from Devin Ryan with Sandler O'Neill. Go right ahead. Good morning, guys.

Good morning, Devin.

Most of my questions have already been asked, but want to see if I could get some color on the restructuring business and whether you guys are seeing the pace of new engagements slow at all just as the capital markets are opening up a bit here. And not sure if you can give this into any context of the level of engagements. I believe, a couple quarters ago you said that you were working on over 100 assignments.

Well, let me sort of give a general picture and then Mike can comment specifically about this. Look, there is no question that as the markets opened in May, the restructuring, the build of the restructuring backlog started to level off. And I think you see it here, elsewhere you can just sort of see it by reading the newspapers. That said, I think we go into 2010 with a pretty substantial amount of activity still. And there are certain sectors of the economy which are still really struggling. And in one area in particular where we have seen a real pick up in activity in the last couple of months is, obviously, the real estate, the commercial real estate sector. So, it is kind of a mixed picture. And it's a good news and I hate to say good news about restructurings, because that doesn't necessarily bode well for the rest of the economy. But sort of the good news in this businesses is that we have a decent amount of activity and backlog going into 2010.

It is not like the last cycle where it just stopped. Realistically when you go back to 2003 and 2004 as the markets recovered, it just pretty much stopped. We are not experiencing that right now. And then the other aspect of it is that when you look at our restructuring business today, it is very different, not only from everybody else's restructuring business, we've spoken about the size of it relative to anybody else's. but it is also different in terms of how it is diversified geographically. In the last cycle it was primarily a US business. In this cycle we really have done an excellent job of building out the franchise in Europe and actually around the world and I think what we are seeing in Europe is an activity level that is higher and the build stronger than in the US. And so that probably puts us in a reasonable place in 2010. But look, it is really very much a function of the economy and the markets, it is just not what -- we are not seeing the cliff that we did in 2003 and 2004 as we came out of the last cycle.

And, Mike, if you could comment on the level of engagements, that would be great as well.

Well, I think we have a couple of comments in the release. The most important one, I guess the most important two is during the year we have been working on close to 140 transactions. And there are still roughly 70 transactions that are still engaged in, which is down slightly from where it was at the end of the third quarter, but still pretty, a pretty high level. I think it was close to 80 at the end of the third quarter. So as we've had some more completions in the quarter, it is obviously being replaced with some new assignments, but not the same pace before.

I think as we look at it, though, levering a little bit on what Ken said, yes, you have got some of the industries that haven't been touched, but you have also got a lot of debt that is coming due from the high issuance period of the high yield market. Some of that debt has been pushed out a bit, but we look at that sort of as the next backlog build, because the fundamental issues in some of those companies, the liquidity and debt covenant issues, haven't really been addressed. And so we would not be surprised, given what we and others expect to be the continued high level of defaults for that activity to continue throughout the year.

Got you. And just thinking about 2010, if you have 70 assignments do you think it is likely that most of those would be completed over the next year, which I guess could bode well for, obviously, success fees at least for the next year.

Yes, it's -- as you know these transactions take, generalizations are always dangerous, take anywhere from six to 18 months to complete. Restructuring is normally on the longer side. So, yes, I would expect a number of them to be completed throughout the year, exact timing is almost anybody's guess.

Okay. Just moving on, I just want to make sure I am clear on this. Can you guys explain again why you are making staff reductions at this point in the cycle. And just is it primarily related just to the culling of less productive bankers or senior bankers and, I guess, hopefully upgrading those seats. Is that primarily what it is.

I think -- look, we are -- we have been doing this for the last several years. It is a continuation of that policy. I think, frankly, we see the ability to upgrade in certain areas as being pretty significant in this marketplace. And it is always a tough thing to talk about people in those terms, but the reality is is that we have to go -- I think to be a vibrant franchise like this you have to go through this. And then if you have got a platform like ours and you have got some of the issues around some of the other platforms that are out there, I think it gives us a great opportunity to hire some bankers in areas where I think it makes a difference here.

Great. And then just lastly, you guys have had very strong net inflows and asset management over the past couple quarters, can you just give any color on commitment levels currently or expectations for additional flows in future quarters.

Well, as you know, like the banking backlog and pipeline, we don't give specific guidance on the Asset Management side as well. I think what we have been seeing this year is you really in a sense getting the fruits of the investments that we've been making over the last several years in upgrading both the research professionals that would hopefully then be driving improved performance in the funds, a much better and more targeted effort toward marketing, particularly of our more successful funds. And what you are also seeing now and again in this website presentation we will be posting later, we'll be giving a snap shot like we did last quarter of the select group of mandates that we have gotten funded over $200 million and so significant mandates.

And you see that they are coming not in any one particular area or from any one source, it is a broad base of different client profiles that are now you're giving mandates to us and they going across to a whole bunch of different strategies. I think it is the global, the overall repositioning and upgrading of the business that we have done and spent a lot of time over the last several years. And I think the -- we are continuing to be invited to new pitches and we're got a success rate that is pretty good.

Great. Okay, thanks for taking all my questions.

(Operator Instructions). Our next question comes from Howard Chen with Credit Suisse. Go ahead.

Good morning, Ken. Good morning, Mike.

Good morning, Harry, how are you?

Well, how are you?

Good, thanks.

Just a follow-up on the Assert Management flows. Are you still benefiting from a backlog of the unfunded mandates that you spoke to last quarter. Are we in a more steady state now.

I think we are pretty close to that steady state at this point. As you know, with the back -- there were mandates that weren't being funded by anybody, I don't think, in any firm for that sort of fourth quarter last year and first two quarters of this year and then it began to catch up. And as I said, in the third quarter don't annualize the $7.7 billion that we had then. But I think we are getting close to the stage where a lot of that, if you will, old backlog has been -- has come in and now you are into more steady state business.

Right. Thanks. And then with the announced changes in the comp policies, are there any changes to the lockup schedules for the MD partners or the Wasserstein family stake. And can you just refresh us where all of those stand now.

Sure. Let me just comment on both topics. On the lockups on the MDs for the original IPO stock, nothing has changed. As you know there is a event on May 10th that is the third tranche. And then with regard to the Wasserstein Trust, you should probably direct your questions directly to them on this, but it is a trust and they are going to always act as a trust. Okay, thanks.

Then just a follow-up on that first part of the question, Ken. Given just the comp policy shifts, do you anticipate any change in the pace of MD sales.

I am not sure, to be honest. I think that you have to look at every individual MDs. There are two factors here. One, obviously, we would love for our MDs to hold our stock forever. That is something that is clearly a benefit to the firm and the lining interest and everything else. But there are some changes in the outside world which we just don't control, one of which is taxes. And my guess is given the noise about taxes going up, people are just going to probably take advantage of a lower tax environment to get some liquidity on things which if they sell in the future are going at potentially much higher tax rate. So that wouldn't surprise me. That said, I just have to believe that in this environment and where we are positioned today, I certainly feel this way being a large shareholder and I suspect many and most of my other partners feel this way as well is that Lazard is better positioned now than ever. And if you thank about it in those terms it is probably a better time to own the stock then ever. But, I think each independent partner, individual partners can be driven by personal concerns and views of the future and taxes and things like that.

Okay. That all makes sense. I just wanted to make sure there wasn't anything specific to kind of -- this shift in comp policy that would kind of drive that in your mind. So that is really helpful.

If anything, I think it gives people a little bit more confidence about the future.

Okay. And then just finally, Ken, taking a step back on the competitive landscape you noted this market share the firm has taken through the financial crisis, but I was hoping to get a sense of how you are seeing the balance sheet intensity of the advisory business evolving as we continue to normalize a bit here.

Look, you tell me what regulatory outcome is going to be in Washington and in Europe and I will tell what the impact on all that is going to be. Look, I think from a clients' perspective, which is really at the end of the day what drives our business, there is no question that the independent financial advisory model is -- and independent financial advise is more valued today then at any time. Certainly than in the last cycle. And I just don't think given what we have gone through over the last couple of years that that's likely to change all that much. And I think the constraints on risk that are gong to be -- that likely to come out of Washington and out of Europe are going to put some constraints around the ability of these larger firms to use capital as muscle in getting these advisory relationships. But that is too early to tell, but that would be my guess.

Okay. Thanks so much.

And our next question comes from David Trone with Macquarie. Go ahead, sir.

Thanks and good morning.

Good morning, David.

Hi, David.

Hi. Couple questions. On the severance side, the staff reduction, if I can just follow-up on that. Was that roughly split between bankers and Asset Management.

No, the focus of this was on the Financial Advisory side of the business.

Okay. And then you mentioned the upgrade dynamic. Are those folks largely already there that have been on the positive side of that equation or is this more perspective folks you might hire in 2010?

I think it is a little bit of function of both. We hired -- we made some significant hires in 2009, so I think your observation is quite astute, but we will continue where we see opportunity to hire great bankers at a senior level to do it.

Okay. And then on the change in deferral you went from 60% plus last year to now back to a more normal 37%. And maybe that is not as relevant to the point I actually want to touch on. Have you seen, since the guys Bulge guys have gotten a lot of deferrals here recently, have you seen an increase in incoming calls. And could this change have been a reaction to that.

First of all, again I said -- what I would like to say this is offense not defense: We see a real opportunity in doing this to strengthen our competitiveness and such going forward. I really don't know specifically what is going on at the large firms. The level of disclosure, the comments and such, it is kind of early days. And I am not -- I just not sure what's happened in terms of all their compensation policies. But, yes, we have gotten incoming phones calls. Yes, there does appear to be some consternation about in the market. But frankly speaking, that has been going on for the better part of year now.

Right, right. Okay and then last question, your alliance with LCM, do you think it will -- will it stay that way or is there a chance at some point you bring that in house and try to expand out to a full fledged equities business.

Okay, two things. One, I am not going to speculate about our future relationship with LCM other than to say that we are very happy with the business Alliance as it is structured today. Both entities, I think, are thriving at the moment as a result of that relationship. I think it -- in the public Company the value to us of being able to have a fee stream associated with this capital structure advisory business and it is not the only fee stream associated with it. It is important and it is attractive because we don't really have to take any risk. And not that the equity business, as you know, is a particularly risky business if structured correctly, but this is a nice arrangement for now. I think we are both benefiting from it and we kind of like it.

Okay, thank you.

And we have a question from James Mitchell with Buckingham Research. Go ahead.

Hi, good morning.

Good morning, Jim.

Just maybe chat about your strategy in the Asset Management business. You want to grow it. Obviously you're a little top heavy in respect with equities versus fixed income and alternatives. How should we think about that going forward, is it more organic at what areas you are focusing on or is there acquisitions also in the mix.

Look, never say never to anything. Acquisitions when done on ways to create value are always attractive. But it is just making sure that you can come up a transaction that creates value. So where we see an opportunity to buy something and it creates value for our shareholders, I think we will look closely at it. But we have done a pretty good job of growing this business organically over the last cycle and through trough. And we are going to count -- that's the first way we are going to do it. We've done it organically. We are going to continue to do it organically and we will be opportunistic and eventually strategic when we see things that add value if we can add them. But we are going to -- I am not going to count on it.

Where are you focusing most in terms of growth. Is it still equities or is it elsewhere.

I would say, look, we have a very strong track record in our fixed income business and so obviously we would like to take advantage of that and continue to build that out. We have had good performance in some of our alternatives and the same thing. And then broadening the equity platform is also important. We are going to do this selectively, carefully, profitably, but we are going to continue to do it.

Okay, fair enough. And Mike maybe a follow-up question on the comp side. When you were kind of running through the math, were you talking about -- obviously you have a base case based on current -- assuming all else being equal, but as revenues grow were you saying incremental comp ratio about 50% on incremental revenue growth.

No, again, I wasn't trying to give an indication of what we would be doing. Again, more in the hypothetical of if we are going to grow comp at a lower level than revenue, obviously there has got to be some number and I was just using a -- an assumption of well if you just did a math based upon upon a 50% ratio for incremental. And that is 50% of notional, I'm sorry, representing a notional comp, where that might lead you and what you might think about in terms of okay, what revenue level might you have to get to to be at that original IPO target.

Right. But you think that's -- is that purely hypothetical or is that something you think is a reasonable kind of target on incremental revenue?

Look, this is Ken, let me kind of try to address this. We get it clearly and we understand it, to drive shareholder value in these businesses you have got to drive down the compensation ratio. And to do that you have got to grow your comp at a slower rate than revenues. We get it, we know what is expected of us from the market to get the kind valuation not only that we perhaps have, but the one that we want. We are going to try to be as disciplined as we possibly can to do this, but I also can't really predict exactly what is going to happen in the outside world with regard to the evolution of revenues and importantly what the competitive environment is like with regard to pay and things like that. And both of those, in some respects, somewhat effect our ability to do this. But I can tell you that if we go up in revenues and the competitive environments for pay and things like that, which I expect will be pretty rational going forward. It may not be this year because of the anomalies of this year, but I think just given the nature of what has gone on from a regulatory standpoint in the public, I think we have got a real good ability to drive down these comp ratios very significantly.

And that was our final question. And this concludes today's teleconference. Thank you for your time and participation. You may now disconnect your lines and we hope you have a wonderful day.