Moelis IPO: The Rise of Independent Financial Advisors

Moelis & Company: Mkt Cap N/A (as of 07/03/2014)

Moelis & Company, the global independent investment bank and financial advisor, filed on
Tuesday with the SEC to raise c. $100mm in an initial public offering. The New York based
company, plans to list on the NYSE under the symbol MC. The Company, advised by Goldman
Sachs and Morgan Stanley as joint book-runners, initially filed confidentially on January 17, 2014.
Since its founding in 2007 by the veteran investment banker Kenneth D. Moelis the Firm has
become one of the biggest of the independent banks, advising on mergers, bankruptcies and other
corporate transactions across the globe. Going public has been part of Moeliss plans for some
time. Its famous founder climbed the investment banking ranks at banks like Drexel Burnham
Lambert and Donaldson Lufkin & Jenrette before moving to UBS. During Mr. Moeliss six years at
UBS, the Swiss firm became a powerhouse adviser, though he eventually left amid clashes with
management in Zurich.
The IPO, the first by an investment bank in the U.S. since the 2007, will establish the firm as the
newest advisory shop to gain a public listing, putting it on the same footing as older rivals like
Evercore and Greenhill. In fact, Evercore Partners Inc., the firm led by former U.S. Deputy
Treasury Secretary Roger Altman, raised $83mm in August 2006 and Robert Greenhills Greenhill
& Co conducted a share sale in May 2004 raising $87.5mm. Evercore has climbed 168% since its
initial offering, while Greenhill has more than tripled since its debut. According to Dealogic, this IPO
represents the first listing of an investment bank in the US since 2007, but the recent stock
performance of its aforementioned peers is encouraging.
As rumoured, Moelis & Co is looking to raise money at a price-to-earnings ratio in the 30s, similar
to the levels at which competitors trade. In fact, Evercore and Greenhill both trade at about 35
times earnings. Therefore, a quick-and-dirty valuation, based on LTM Earnings of $70.2mm, would
suggest a value for the whole company of c. $2.1bn.
The IPO filing illustrates some of the steps Mr. Moelis and his team have taken to become a public
company. The bank trimmed its overall banker headcount last year by nearly 7%, to 317 (including
86 Managing Directors) and it reduced the ratio of its compensation to revenue from 71% to 64%,
a figure still higher than that of main rivals. Mr. Moelis will maintain significant control over his firm
in its new life as a publicly traded concern. The deal maker will control all of the banks Class B
shares, which have 10 votes each, while the Class A shares to be sold to ordinary investors will
have one vote apiece. While other parts of the offering remain unknown for now, the firm provided
a fund-raising target of $100mm, but the number was a provisional one meant to calculate
registration fees, and the company could seek significantly more. Moreover, Moelis did not disclose
how many shares it plans to sell.
The prospectus also highlights, for the first time, how well the firm has been doing. In fact, the
investment bank reported $70.2mm in profit last year, almost twice previous years results, with
revenues rising 6.7% over the same period. As reported by Mergermarket, in 2013 Moelis ranked
12th in worldwide announced deals by value (up from 25
th
in 2012) while Rothschild and Lazard
ranked 13
th
(down from 9
th
in 2012) and 9
th
(up from 11
th
in 2012) respectively. More specifically the
value of Moeliss announced deals rose by c. 223% to $135bn (up from $42bn in 2012) despite a
slight decrease in overall M&A activities. In 2013 Moelis participated in the acquisition of H.J. Heinz
Company by Berkshire Hathaway and 3G Capital ($24.7bn), the acquisition of Omnicom Group by
Publicis Groupe SA ($19.4bn) and the acquisition of Life Technologies Corp by Thermo Fisher
Scientific Inc ($15bn), respectively the 2
nd
, 6
th
and 9
th
largest deals of 2013 by value. According to
Thomson Reuters, the Firm is also ranked 4
th
in announced restructurings worldwide.
These positive results are driven primarily by the fact that, during the past decade, the demand for
independent advice has increased dramatically. In 2013, 80% of the top 10 announced M&A deals
and 75% of the top 20 announced M&A deals included independent advisors. This is a significant
increase since 2003, when only 30% of the top 10 and 20 announced M&A deals included
independent advisors. The reason for this shift towards independent advisory seems to be driven
largely by the actual (or perceived) conflicts at the large financial conglomerates where sizable
sales and trading, underwriting and lending businesses coexist with an advisory business that
comprises only a small portion of revenues and profits. Moreover, the ongoing dislocation at large
financial conglomerates generates growth opportunities for independent financial advisors.
Financial conglomerates are facing increasing regulation and the pressure of managing large
disparate business divisions which translates into challenging compliance requests, higher
operating costs, compensation limitations and increased capital constraints - are affecting their
ability to serve clients and maintain a high return on equity. If these firms will continue to struggle
with these issues, independent financial advisors could have more and more opportunities to
enhance their industry coverage and expand their geographic reach. Finally, given the amount of
debt companies have issued in recent years, a steady recapitalization and restructuring market will
continue to exist if interest rates rise or credit markets become more difficult to access, even with
an improving macroeconomic environment and an anticipated upturn in M&A activity. In fact, both
2012 and 2013 represented record years of leveraged finance issuance both in the U.S. and in
Europe, as companies took advantage of historically low borrowing costs to leverage their capital
structures. Independent financial advisors historically have always been focused on debt advisory
and restructuring services, and can continue to count on this prolific activity thanks to the levels of
leverage present in todays system.




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