Lazard Inc (LAZ) 2015 Q3 法說會逐字稿

Good morning, and welcome to Lazard's third-quarter 2015 earnings conference call. This call is being recorded.

(Operator Instructions)

At this time, I would like to turn the call over to Judi Frost Mackey, Lazard's Director of Global Communications. Please go ahead.

Good morning, and thank you for joining our conference call to review Lazard's results for the third quarter and first nine months of 2015. Hosting the call today are Ken Jacobs, Lazard's Chairman and Chief Executive Officer; and Matthieu Bucaille, Chief Financial Officer. A replay of this call will be available on the Lazard website beginning today by 10:00 AM.

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 SEC, including our Annual Report on form 10-K, Quarterly Reports on form 10-Q and current reports on form 8-K. Lazard assumes no responsible for the accuracy or completeness of any of these forward-looking statements. Investors should not rely upon forward-looking statements for 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 issued this morning. 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 in our investor presentation, both of which are posted on our website, Lazard.com.

Following the review of our results, we will be happy to answer your questions. I'll now turn the call over to our Chairman and Chief Executive, Ken Jacobs.

Good morning. Lazard achieved record operating revenue for both the third quarter and first nine months of the year, despite the uneven macroeconomic environment. Our adjusted results continued to display the operating leverage in our model. Operating revenue rose 2% over last year's record third quarter. Earnings from operations increased 24%, and pretax income rose 33%.

M&A activity remains healthy. Among advisory-focused firms, Lazard is best positioned to the large, strategic, complex and cross-border assignments that characterize this M&A cycle. Year to date, we're advising on 3 of the 10 largest global announcements. Approximately 40% of our announced transactions are cross-border, and we have significant market share in the most active sectors for M&A.

In restructuring, we continue to gain energy-related assignments. Lazard remains the global leader in announced restructurings year to date. Our Sovereign Advisory business is active worldwide, with assignments in Eastern Europe, Africa and the Americas. And our Capital Advisory business has seen increased activity in both Europe and the US, as we advise clients on capital raising and balance sheet structure. The European IPO market has had a strong start in the fourth quarter, and Lazard is advising on a number of the largest offerings.

In Asset Management, late summer market volatility challenged investment managers across asset classes, yet our business achieved net inflows for the third quarter. The inflows were driven by strategies in global and multi-regional equities, as well as emerging market debt. The resiliency of our Asset Management business reflects fundamental strengths, including a primarily institutional global client base, broadly diversified investment platforms, and a pattern of long-term performance. We continue to see investor demand across our platforms.

Matthieu will now provide color on our financial results and capital management.

Thank you, Ken. Operating revenue increased 2% for the third quarter, and 5% for the first nine months of 2015, compared to the 2014 period. Pretax income increased 33% for the third quarter, reflecting the operating leverage in our business models.

Financial Advisory operating revenue increased 14% for the third quarter, and 12% for the first nine months of 2015, compared to the 2014 period. The increases were driven primarily by M&A and Other Advisory, which rose 19% for the third quarter and 15% for the first nine months. Asset Management operating revenue decreased 9% for the third quarter, and 2% for the first nine months of 2015, compared to the 2014 period.

On a sequential basis, management fees decreased 4% from the second quarter of 2015, in line with average AUM, which decreased 5%. As discussed in our last call, incentive fees were down versus last year, and we expect them to continue to be muted in the fourth quarter, similar to last year. AUM ended the third quarter at $183 billion, down 8% from the 2014 period, driven primarily by market depreciation of $16 billion, foreign exchange movements of approximately $5 billion, and net inflows of $201 million.

Recent improving market conditions in global capital markets have had a positive impact on our AUM. As of October 16, AUM was $193 billion, an $11 billion increase since September 30. The increase was driven by market appreciation of $8 billion, and foreign exchange movement of $3 billion, with slight net outflows of $14 million.

Turning to expenses. We continue to accrue compensation at a 55.6% adjusted compensation ratio, consistent with the first two quarters of this year and our full-year 2014 ratio. Our adjusted non-compensation ratio for the third quarter was 17.2%, compared to 18.8% in last year's third quarter. The decrease in our non-compensation expense primarily reflects our continued cost discipline, as well as some foreign exchange benefits. Our non-compensation ratio also decreased for the first nine months, from 19.1% a year ago to 17.9%.

Turning to taxes. Our adjusted tax rate in the third quarter was 16.9%. We expect our full-year 2015 adjusted tax rate to be in the mid to high teens, which can vary depending on the geographic mix of our revenues. In 2016, assuming similar business conditions as in 2015, our adjusted tax rate could be in the range of the high 20%s to low 30%s. However, we expect our cash taxes to remain in the high teens.

As previously reported, we repurchased a portion of our payment obligation relating to the tax receivable agreement during the third quarter. Including $18 million of additional valuation allowance released, we had a one-time benefit of $277 million, or $2.08 per share for the quarter.

Finally, regarding Capital Management, in the third quarter, we returned $88 million to shareholders, primarily through $44 million of dividends and the repurchase of approximately 0.8 million shares, or $41 million. In line with our objectives, we have more than offset the potential dilution from 2014 year-end equity [rate].

Ken will now conclude our remarks.

Thank you, Matthieu. To summarize our third quarter highlights, record operating revenue for both the quarter and first nine months. Continued strong activity in M&A globally. Resilience in Asset Management despite a challenging market, strong earnings growth, significant cash generation, and continued return of capital to shareholders.

Regarding our outlook, the environment remains conducive to M&A. Companies are hard pressed for organic earnings growth, while the cost of financing acquisitions is low and valuations are reasonable. Boards and CEOs are generally confident in the future, despite recent market volatility.

Asset Management faces a headwind of lower AUM in the short-term, but has solid fundamentals, as institutions around the world continue to expand their investments beyond local markets, demand grows for sophisticated multi-asset solutions, and defined contribution plans increasingly seek institutional quality investment managers such as Lazard. Long-term trends remain favorable for both our businesses, and we are in an excellent position going forward. Lazard has a global advisory business that competes at the highest level, a world class Asset Management franchise, operating leverage and high productivity, capacity for increased activity in organic growth, and we are maintaining our cost discipline.

We continue to focus on building value for our clients and our shareholders. Let's open the call to questions.

Thank you.

(Operator Instructions)

Our first question will come from Brennan Hawken, UBS.

Hi, good morning, thanks for taking the question.

Sure.

So on the buybacks, it was a bit lighter than I was looking for, which I actually thought, given some of the action in your stock this quarter, you might surprise to the upside. Are there any other calls on capital that we should be aware of? Should I be moderating my expectation for buyback? Was there any reason why you didn't choose to capitalize on the market weakness to buy back a ton of stock?

Sure. First, there are no other capital calls. Second, a lot of the volatility took place during the black-out period, and so it's a little difficult to be aggressive during black-out periods.

Okay. And just so I know, the black-out period -- is that the two weeks leading into the end of the quarter, and then up until you report?

The blackout really, with respect to us repurchasing stock, starts in the first month of the last month in the quarter. So that was September 1.

Okay, got it. That helps, thanks. And then just to clarify a couple of the numbers that I heard from you, Matthieu, on Asset Management, the $3 billion FX headwind, was that in 3Q, or was that 4Q to date?

Okay, so let me repeat and make -- be very clear. In the third quarter, the foreign exchange impact was approximately $5 billion. And since September 30, the impact of the foreign exchange was $3 billion.

Positive.

Positive, in both case. I'm sorry, negative -- sorry. Negative in the third quarter, and positive since September.

Okay, great.

Is that clear?

Yes, thank you for that. And there's a decent amount of investor anxiety around EM, and focus on your Asset Management business. So it would be interesting to hear how your conversations are going with your Asset Management clients. Can you maybe give us an update on alpha generation for your largest strategies, and a look into the RFP pipeline?

Ashish, you want to take this?

Yes. Brennan, I think the important thing to keep in mind for institutional clients, EM is a strategic allocation, not a tactical allocation. So if anything, search activity in EM equity and debt continues. And as EM has underperformed over the last few years, they -- even if they're not increasing their allocation, just by rebalancing, you have more demands for EM. So that's point one.

In terms of EM strategies, we have an EM platform that has six main strategies. Our large value fund, like most value funds, has underperformed in the short run. But long term, the performance is good, and the demand is there. And then the more growth-y funds have outperformed because markets have been very kind and friendly to the growth guys, and the momentum guys. And most of the value has lagged in the recent couple of quarters.

Does that get you to your answer?

Yes, it does. And then, if you could give an update on the RFP pipeline -- how things are looking? Is it stable, is it picking up, given the need to rebalance, or is it declining, given some of the concern over volatility?

I think in the third quarter, it would be fair to say RFP has slowed down a little bit. But since then, we are starting to see a slight pick-up. When the markets are extremely volatile, people tend to just sit back and watch a little bit. But since then, we've seen a pick-up. But EM as an asset class has -- we have not seen any marked shift, in terms of new RFPs coming in. In fact, my guess is you will probably see some pick-up in EM RFPs over time.

Great, thanks for that color, Ashish. And then last one for me: Non-comp looked really good this quarter. I'm sure FX was at least somewhat of an impact. But could you maybe unpack, a little bit, what the drivers were of the decline sequentially or year over year, and whether or not there were any one-time benefits we should be aware of in that line item? Thank you.

Right. So as I said in my comments, generally, the decline in non-comp is due to our overall good cost discipline across the Firm. As you said, there was a little bit of benefit from foreign exchange. Remember that Q3 is generally a seasonally low quarter versus Q2. So when comparing to Q2, you should take this into account. Also, you've seen that we continue to have certain cost saving initiatives. In particular, in the line outsourcing services, you'd see that the non-comp reduced there. And part of it is due to a new initiative, and there is a little bit of a one-time-off there.

Okay, any chance to quantify that one-time?

It's just -- no. It's really just less than -- a few million, $1.5 million.

Thanks so much.

The next question comes from Dan Paris, Goldman Sachs.

Hi, good morning, guys.

Good morning.

Last quarter, you spoke about needing some kind of discontinuity in the financing markets as a key driver of restructuring activity. I'm curious if the moves that we've seen in spreads, and the decreased activity that we're seeing in equity-raising markets, has been enough to spur restructuring mandates outside of the energy sector?

So far, I think most of the restructuring activity pick-up that we're seeing is in the energy sector. It may -- you may see some flow-over into commodities generally, over time. But primarily, the impact of any discontinuities in the financing markets has been limited to the energy sector for us, at least as we see it right now.

Okay, fair enough. And then I guess along the same lines of thinking, any parts of the M&A market that you've seen dry up a little bit, relative to the past couple quarters, given some of the moves we've seen in the macro space?

Whenever there's volatility, there tends to be a little bit of a pause in M&A, because it's a business which tends to be driven by financing, valuation, sentiment. Financing during that -- for the most part, over the summer, was still readily available and relatively inexpensive, particularly in the investment-grade part of the market, which is the real driver of large M&A. In the valuations, given the volatility, you have some tendency towards uncertainty, just until things settle down a little bit, which they seem to have so far. And on sentiment, that's the thing that gets rocked the most in a volatile period.

That said, the trends -- long-term trends around M&A appear to us as strong as they've been in a long time. The factors driving the long-term trends around M&A are probably -- amongst the most important are the following. One is the drive for top-line growth. The second is to drive for operating leverage in your business.

The period 2008 to 2012/2013 was a period where the premier companies around the world focused on a lot of productivity improvements and driving operating leverage because there was little growth on the top line. Today, even though the macroeconomic cycle has picked up, we're in a fairly low-inflation/deflationary environment, so it's hard to come by top-line growth. So M&A serves two purposes right now. One, it drives additional top-line growth, and second, it allows for additional operating leverage through cost reductions and productivity improvements. And that seems to be the long-term driver now -- or the key driver on big M&A at the moment. And that is going to last for a while, it feels like to us.

Is there anything that you'd call out, in terms of composition, shifting, i.e, have sponsors become more active with some of the recent sell-off? Are you seeing any -- obviously, large-cap deals continue to dominate, but anything in the middle-market space?

This stuff can change week by week; a big deal captures people's attention. I think what you're seeing is that most important companies around the world are viewing M&A probably as a much more important tool for them than they have in recent macroeconomic recoveries, just because of the nature of this recovery, which is some growth, particularly in the developed world, uncertainty in the developing world, and a deflationary environment -- low-inflation/deflationary environment is driving this. So whatever sectors are affected by that -- and it's probably most at this point -- I think you're going to see pick-up in M&A. It will be uneven, just because M&A is not a straight-line business.

All right. Thanks very much for taking my questions.

The next question comes from Ashley Serrao with Credit Suisse.

Good morning.

Hi.

I'm just curious if you could just elaborate on your commentary around restructuring and energy? What are you hearing from -- when you talk to companies? And give us a flavor for some of the environment; it looks like the banks are revaluing loan collateral as we speak. Do you expect a pipeline to build? Any color there would be appreciated.

Sure. I think we're seeing the M&A -- the restructuring pipeline in the energy sector build. I wouldn't get too excited about restructuring because we're still in a reasonably good macro environment in the developed world, and we also are in a very attractive financing environment still. So I don't think you're going to see this spread out to other sectors.

But the energy sector is going through a tough time. People are starting to adjust to what it means to have a lower oil price, natural gas price, commodity cycle, at levels we're seeing it, for a long period of time. And with that comes lots of stress on balance sheet, and that's what people are adjusting to right now. And that's going to continue for a while. And so I think we're going to continue to see the pipeline in the energy sector build, unless you see a recovery in price.

Okay. And then a second question, just following up on Brennan's question around capital management: I heard your comments on being precluded from buying back stock due to black-out period. But just curious how -- just more broadly and philosophically, how you'd be thinking about a special versus perhaps buying back some more stock in 4Q? Just any thoughts around that would be appreciated.

Look, we are pretty consistent, in terms of our statements around this. We generate a lot of cash, 110%, 115% of net income. Aside from what we get our debt management, the rest of it we have historically returned to shareholders. We've used two ways to do that. One is share repurchase, the second is dividend -- or three ways to do it -- share repurchase dividend, regular dividend, and special dividend.

On share repurchase, the goal is to offset any dilution associated with any of the compensation -- deferred compensation -- over the course of the year. We've already done that this year. We look at share repurchases on an opportunistic basis. If the share price looks attractive to us, and at the same time we're free to buy, we may do that. On the other hand, we've also been very clear that you don't know your cash, and your exact position, until you get to year end. And returning capital through a special dividend is an especially effective way to get cash in the hands of our long-term shareholders.

Okay. And I guess final question: Looks like Europe is on the verge of perhaps another wave of QE. Curious what CEO sentiment is like in the region, and what kind of trend you're seeing there? Does deflation still apply to the European region? Is it more of a challenge in pursuit of growth? Any high-level color would be great.

Sure. So look, Europe is probably better off now, as a whole, macroeconomically, than any time since the crisis. It's still a very difficult environment. The banking sector is more stable; you've got a real commitment to a looser monetary policy and, therefore, some impetus for stabilizing the macroeconomic environment comes out of that. But it's still a challenging environment, with low growth.

And when you look at European companies, they tend to be highly global. They obviously have big exposures to Europe, but they also have big exposures to the US, which are probably positive right now. And yet they also probably have big diversification into some of the developing markets, China and the like, which are a little more uncertain today than they were over the past.

So I'd say it's hard to generalize unambiguously what the confidence levels are in Europe, or what sentiment is across all industries and all CEOs. But generally speaking, it's probably better than it was a few years ago. It probably isn't quite as strong as is the case in the United States, and you have to go sector by sector to really have a good feel for it.

M&A activity in Europe is a little more muted than it is in the US, but it's not bad, and our own position has been pretty good [through] this year. It was good last year. It's, I think, the same this year, when you adjust for currency. I think we're pretty happy for how we've done relative to market. So I think it continues to be a pillar of our Business.

Great. Thanks for taking our questions.

Sure.

The next question is from Devin Ryan, JMP Securities.

Hi, thanks, good morning. I just had a question on healthcare. It's been such a big sector in the M&A markets, and we've seen some pretty extreme volatility there recently. So just want to get a sense of if you're seeing any change in sentiment at the Board level? There's a lot of factors, I think, that is driving the volatility, but anything that you think may slow the deal pace in that important sector specifically?

Yes, I think things are a little bit all over the map in healthcare M&A. And frankly, the backdrop is really -- it's a highly deflationary environment for the healthcare markets. If you think about it, what's really been driving M&A in healthcare is this tremendous pressure on price, as a result of healthcare changes in the US, partly the ACA Act, partly the massive focus on productivity amongst the large employers in the US post the crisis in 2008. And the combination of both have just dramatically changed the healthcare pricing environment, cost environment in the US.

That trend is going to go on, at least in my opinion, for a very long time. And a lot of the M&A activity that's taken place in the service sector and in the life science sector is a result of trying to adjust to this new environment. You're going to see a lot of volatility, because when people are under so much price pressure, business practices change, and people experiment with new models. And they try to do different things to preserve their market position. And I think we're going through a period right now where that's taking place, and you're going to see some -- you're seeing some of the outcome of that.

So I think you're going to see a highly volatile environment for healthcare for the foreseeable future. You're going to continue to see a pattern of M&A. It may be -- again, have stops and starts. But in an industry which is under so much cost pressure, you have to have combinations to adjust.

Got it, very helpful. Maybe moving on to the competitive environment, there's been a lot of independent firms that have really expanded in recent years. I think a lot of the brands are more high profile today than they were 5 or 10 years ago. And so you guys as a Firm are still growing share. But when you think about the environment, are you seeing more independent firms that bake off the competitive dynamic with them increasing, or is it still just a function of the biggest competitors are the bulge brackets, and that's who you're fighting with, day after day?

So look, let me approach this from a couple different ways. First is competitive environment; let's go pre-crisis/post-crisis. Pre-crisis, there were probably 8 or 10 firms that could compete on intellectual capital globally. Today, there are maybe three or four, and we're the only independent that can do that. So that's number one.

So in terms of market position, if you think about what we do on the advisory side, it's -- we compete on intellectual capital, on the advisory side, on a global basis. There are two or three firms, other than us, that can do that -- large firms. There are no other independents that can do that yet, today, on a global basis. So -- and pre-crisis, there were 8 to 10 firms that could do that. So I think I'd rather take today's environment for our Franchise to the one pre-crisis.

As far as the independents are concerned, I think it's -- some have done well. Some will do well over the future, and some will probably have to adjust, but that's like any marketplace. What we've really seen in the independents is a shift of talent out of some of the larger firms to some of the independents. And so far, some of these franchises have done well. They tend to be more domestically focused. They tend to be more focused around industry groups.

No one has really broken out globally yet, and I think that's where the real challenge is for everyone, because that's the hardest thing to do, is to have a global franchise as an independent. And I think that's our key competitive advantage. I am pretty confident someone will break out at some point, but I still think the competitive landscape is more favorable for us, regardless of whether one or two or three of the independents break out globally, than it was pre-crisis. And so we're feeling pretty comfortable, not taking it for granted, but feeling pretty comfortable with the competitive environment we're in for the next few years.

Got it. That's very helpful. And maybe following up on that theme -- so you alluded to less firms today having that global reach, and you look at the European banks, and clearly going through some pretty sweeping changes, even today. Not sure that's [employee] impacting the advisory pieces of the business. But do some of these newer changes create opportunities? Or do you expect opportunities to come out where morale may be lower, and so there's good talent that's available, or even an opportunity to go after some clients that you haven't done business with before?

I think on the client side is the greatest opportunity because, again, as I said before, the differentiating feature of our Firm is to be a firm based on intellectual capital that's global, and you can really differentiate yourself in that regard. And there's only a few people that can do that well amongst the larger firms today. And so from a client side is the best and biggest opportunity.

On the talent side, look, the reality is, you've already seen a large shift of talent away from some of these franchises to the boutiques. There's probably some still to go, but this -- it has really been a slow, steady, grinding, painful process, since the crisis, for some of these firms, where probably the first act was the crisis itself. The second act is probably the adjustments that are going on now. The third act is what it all looks like afterwards. And I don't think we know how it's all going to play out yet. But I think you're seeing a lot of the movement of talent already, probably.

Okay, great. Thanks, Ken, appreciate the color.

The next question will come from Joel Jeffrey, KBW.

Hi, good morning, guys.

Good morning.

Just thinking about the operating leverage in the Business -- your comp ratio is running in line with where you were for the full year last year. And if we think that we have a traditionally strong fourth quarter, should we expect to see another true-down in the comp ratio in the fourth quarter?

You tell me what the revenues in the fourth quarter will be, and I'll tell you what the comp ratio will be. The truth is that, as you guys know, we accrue comp at the average of the previous year, for the first three quarters. So we've done that for the last few years, as long as the revenue environment is stable, which it has been.

And the fourth quarter is obviously an important quarter for everyone in our business. It tends to be a stronger quarter for most people. And so a lot depends on how the fourth quarter goes, as to how we do on revenue. How we do on revenue, and then what we ultimately do with compensation. What I would say is, when we get revenue increases, we've been able to, over time, do a pretty good job of getting some operating leverage out of the comp ratio.

Great. And just thinking more broader picture, in terms of the recent slowdown in the Chinese economy, if this is a more longer-term trend -- and understanding that their regulatory environment is going to be a little bit different -- but does that open up opportunities for increased M&A coming out of China, in your opinion?

Yes, but in the end, the big [fee] pool for M&A is the US and Europe. And while the fee pool in China and Asia is growing, the lion's share of the fee pool is in the developed market. So I think that's going to be the key driver of all of our businesses for the foreseeable future. And what happens in Asia will help, over time, but I think it's not going to be the key driver.

Okay, and then just lastly for me, the emerging market debt continues to see inflows, and you guys continue to talk positively about it. Just wondering, with the equity markets and the emerging markets going through some turbulence there, why does the debt product seem to be that much more attractive to customers?

It's a differentiated product. It allows specific investments in sectors or products, which give you differentiated kind of returns, and I think that's it in a nutshell.

Great, thanks for taking my questions.

Sure.

The next question will come from Steven Chubak with Nomura.

Hi, good morning.

Good morning.

So I guess my next couple of questions are probably best to ask Ashish directly. First, on the fee rate, what we saw within the Asset Management side, one of the pleasant surprises in the quarter was that that fee or realization rate managed to stay so resilient, despite more pronounced AUM declines that we saw in some of your higher-fee EM strategies. I was just hoping you could speak to some of the factors or dynamics that are driving that resilience that we saw in the fee rate?

Did you want to answer the question?

The fees -- on the fees, the fees -- the impact on the fee is really not very significant from this quarter versus last quarter. So we were approximately at 52 bps this quarter, and we were approximately the same level the quarter before. There is, versus last year, a slight decline, but it's just really only 1 bps. I think it's just because the nature of the flows offset some of the negative impact of the outflows.

Okay. Thanks, Matthieu, that's really helpful (multiple speakers). Sorry?

I think in the portfolio of businesses, there are a lot of products that have higher fees beyond emerging markets. And we have a pretty broad portfolio of investment strategies, with reasonably decent fee structures. So quarter to quarter, the impact is [minimal].

I understood. And then, Ashish, maybe just spending some more time on the RFP backlog -- and I did appreciate some of the color that you had given there. But what we have been hearing from some of your competitors is that they've experienced some outflows from the larger sovereign wealth funds, particularly those that have more gearing to -- or significant energy exposure. And just given your institutional tilt, have you seen any shift in risk appetite from those clients in particular?

I think people who are very levered to oils of Middle Eastern sovereign wealth funds, in some cases, have taken assets out, and particularly trying to run their budgets. But overall, we have not seen that. In fact, if anything, people are still looking at adding more money to certain areas. I think, from the normal channels, RFPs slow down during highly volatile periods. But additional contributions from existing clients, and without RFPs, continue if they feel that there is an opportunity to keep adding assets. So there's no discernible pattern, other than the month of August and September things slowed down, and then it picked up a little bit.

And also, I'd probably add to that. I don't think we've got as much exposure from sovereign wealth funds as some of the other institutions that you're probably referring to.

In the Middle East, and [so forth].

Yes, Middle Eastern ones.

Okay, thanks for that color. And then just one more on the capital management side, and not to beat a dead horse, Ken, but I did just want to look at it from a different angle where, given some of the strong capital build that we've seen, as it relates to some of your recent tactical actions on the tax side of the equation, is that going to drive some increased capital return capacity, as we think about capital management, and potentially a higher special into year end?

The short answer is, we're going to do essentially what we've done in previous years when we get to year end, which is, what cash we have, we'll sweep it and return it. We've done this now for a couple of years. Unless something surprises us in the fourth quarter, we would expect to do the same thing. Our investment is through the P&L and, therefore -- and we've done what we need to do around the debt management for the foreseeable future, therefore, the rest of the cash. And we want to get it back to shareholders as efficiently as we can.

All right, thanks for that color, as well, Ken, and congrats on the strong quarter.

Thank you.

The next question will come from Jeff Harte with Sandler O'Neill.

Good morning, guys.

Good morning.

A couple wrap-ups from me -- one, you've alluded to this, but I want to make sure I'm getting it right. I've been getting, still, a lot of questions about spreads widening, some headwinds in debt capital markets -- does that have any impact on M&A? It sounds like you're saying that debt capital market headaches in the third quarter really haven't had an impact on the M&A pipeline, in your mind?

Look, the large-cap M&A is primarily driven -- there are exceptions, Dell may be one. But it's generally driven by the investment-grade markets, which have remained very strong. We've done a couple things recently where it's just stunning -- the appetite in the investment-grade market at the moment. So that core -- that's the core driver of the large-cap M&A that is taking place.

So, no, the spreads widening in the high-yield markets don't seem to impact that. I think where you're seeing the impact is in sectors that are more vulnerable -- energy. I think the private equity sector, obviously a little more muted this time around than the last cycle, so it hasn't had as much impact. And so that would be, I think, our observations on that.

Okay. And you talked a little bit about the competitive environment. How much more or less competitive is the environment for advisory mandates in Europe, relative to the US?

There are probably more local competitors in Europe by country, that you compete against, than there are in the US. But we tend to do pretty well in Europe, just given our historical roots there, and franchise and connectivity locally and such. There's probably still more capacity in Europe than there should be, overall. And fees in Europe are not the same level as the US. They've improved since the crisis, but they are still not back to where -- they're not at the level of the US.

Okay, thank you.

The next question will come from Patrick O'Shaughnessy, Raymond James.

Good morning. So my first question, on the Asset Management side of things, how long does it typically take institutional clients to rebalance after there's a significant underperformance by an asset class? So if EM is particularly weak for a quarter, are they rebalancing the next quarter? Does it take them a few quarters to figure out where they want to go? What's that timeline typically look like?

It varies dramatically, client by client. Certain clients, particularly large European pensions, do it much quicker, because they make those decisions in house. A lot of domestic clients take a little bit longer, and wait a couple of quarters, or they look at their -- they analyze over a couple of quarters. So it really varies all over the place. Some of the ones are very, very quick, actually. They will add. And those are not obvious to you in RFP activities because any contributions don't go through an RFP process. So that's the part that's harder for -- to judge, for you guys.

Got it, appreciate that. And then a quick question on the M&A side of things: I think we could characterize the M&A environment as being very top-heavy -- a lot of very big deals, and not a lot of the smaller middle-market deals. So you talked about the favorable environment, and companies needing to turn to M&A for growth, and to get that leverage. At what point do you think that starts bleeding down to the middle market? And are you positioned to really capture that, or do you think you're just going to stay primarily focused on most of these large-cap deals?

A couple things -- one is that our middle-market business, the [LMM] business, is actually having a pretty strong year so far. So I'm not sure I'd characterize the middle market, at least the way we define it for the LMM business as being not a very buoyant market at the moment. It's pretty good, actually, it feels like to us.

I think what you're referring probably to is the $1 billion to $5 billion to $10 billion deals. It's been a pretty decent market there. We have our fair share of those. And at the same time, I think the -- this cycle is really so far dominated by the larger companies doing the most important things for themselves. I think we'll see some spread over time, and it's going to be more sector by sector.

You've seen, actually, a fair amount of middle market -- what you would define that $1 billion to $10 billion or $20 billion M&A market has actually been very active in healthcare. I think you'll see a little bit of a pause due to some of the turmoil right now, but probably picks up again. And you've seen a fair amount of activity in that sector in tech. You haven't seen as much in general industrial; probably see some pick-up there over time. But I wouldn't say it's been a bad period for M&A there.

All right, great, thank you.

The final question will come from Vincent Hung, Autonomous.

Hi, good morning. How's it going?

Good.

I'll keep it to one question. So I've got the bigger-picture question here. So it's been quite a spectacular year for the so-called mega deals, and one of the positive effects from that is you're going to see sales, spinoffs, et cetera, to satisfy the anti-trust requirements. But given that we've seen so many transformational deals, how much more room is there for so-called mega consolidation because it seems like some industries can't become even more concentrated. So I just want to get your take on that.

There's probably a mega deal or two by industry, but then you have to remember that there's still a lot of other players in the industry and, therefore, there tend to be a lot of other moves that take place to accommodate that. And then oftentimes, where there's something in one industry, it has a peripheral impact on a second industry, and the same thing happens.

M&A, or strategic M&A, is a little bit like a chess board. You're trying -- you make one move, and it has an impact on the next two or three moves for other people. And everybody's chess board is a little bit different, but everybody has to adjust to other people's moves and strategies. And so I think every time you see one of these big moves, you're going to see countermoves somewhere else. They may not be as big and visible, but they certainly happen.

Great. Thanks a lot.

And there are no further questions.

Great. Thank you.

Thank you. This now concludes the Lazard conference call.