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Edited Transcript of EVR earnings conference call or presentation 31-Jan-18 1:00pm GMT

Q4 2017 Evercore Inc Earnings Call

NEW YORK Feb 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Evercore Inc earnings conference call or presentation Wednesday, January 31, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John S. Weinberg

Evercore Inc. - Executive Chairman

* Ralph Lewis Schlosstein

Evercore Inc. - President, CEO & Director

* Robert Brien Walsh

Evercore Inc. - Executive VP, Senior MD & CFO

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Conference Call Participants

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* Brennan Hawken

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials

* Conor Burke Fitzgerald

Goldman Sachs Group Inc., Research Division - VP

* Devin Patrick Ryan

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* James Francis Mitchell

The Buckingham Research Group Incorporated - Research Analyst

* Jeffery J. Harte

Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research

* Michael Anthony Needham

BofA Merrill Lynch, Research Division - Associate

* Steven Joseph Chubak

Nomura Securities Co. Ltd., Research Division - Former VP

* Vincent Hung

Autonomous Research LLP - Partner

* Yian Dai

Keefe, Bruyette, & Woods, Inc., Research Division - Assistant VP of Equity Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Evercore Fourth Quarter and Full Year 2017 Financial Results Conference Call. (Operator Instructions) This conference call is being recorded today, Wednesday, January 31, 2018.

I would now like to turn the conference over to your host, Evercore Chief Financial Officer, Bob Walsh. Please go ahead, sir.

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [2]

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Good morning, and thank you for joining us today for Evercore's Fourth Quarter and Full Year 2017 Financial Results Conference Call. I'm Bob Walsh, Evercore's Chief Financial Officer. And joining me on the call today are Ralph Schlosstein, our President and Chief Executive Officer; and John Weinberg, our Executive Chairman. After our prepared remarks, we will open up the call for questions.

Earlier today, we issued a press release announcing Evercore's fourth quarter and full year 2017 financial results. The company's discussion of our results today is complementary to that press release, which is available on our website at evercore.com. This conference call is being webcast live on the Investor Relations section of the website, and an archive of it will be available for 30 days, beginning approximately 1 hour after the conclusion of this call.

I want to point out that during the course of this conference call, we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties, and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. These factors include, but are not limited to those discussed in Evercore's filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. I want to remind you that the company assumes no duty to update any forward-looking statements.

In our presentation today, unless otherwise indicated, we will be discussing adjusted financial measures, which are non-GAAP measures that we believe are meaningful when evaluating the company's performance. Additionally, unless otherwise indicated, these financial measures exclude the impact of the enactment of the Tax Cuts and Jobs Act that was signed into law on December 22, 2017. For detailed disclosures on these measures and their GAAP reconciliations, you should refer to the financial data contained within our press release, which as previously mentioned, is posted on our website.

We continue to believe that it is important to evaluate Evercore's performance on an annual basis. As we've noted previously, our results for any particular quarter are influenced by the timing of transaction closings.

I'll now turn the call over to Ralph.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [3]

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Good morning, everyone. 2017 was another successful year for Evercore, driven by yet another year of very strong growth in our advisory business. We finished the year ranking first in both the U.S. and the global league tables based on the dollar value of announced transactions among independent firms, fifth in the U.S. among all firms and seventh among all firms globally. These are the highest year-end rankings attained by the firm in our history. While all firms have not yet reported, we expect to end the year with an advisory market share, based on revenue, of at least 6.7% among all firms, large and small, that report advisory fees separately. That's an increase from 6% last year.

We are also gaining market share among all publicly traded independent advisory firms. Our 2017 performance demonstrates the broad capabilities of our franchise. We are advisers of the 2 largest M&A transactions announced in 2017, the largest transactions across multiple sectors, including retail, U.S. REITs, transportation, U.S. telecom and the second-largest media transaction. We advised on 3 of the 5 largest activist-defense campaigns globally in 2017 and are currently advising companies in -- on activist defense representing $1 trillion of market cap. We also advised on the largest public market takeover ever announced in Singapore, and were named as the best M&A adviser in Singapore for the third consecutive year.

Revenues from Capital Advisory services, including underwriting, grew over 60%. Our global presence widened with new Evercore offices in Asia and the Middle East, and our sector teams strengthened significantly, especially in general industrials.

Our results this year are a testament to the strength of our team and our steady investments in talent, both in recruiting senior talent to the firm and in developing and promoting high-quality senior talent within the firm. 2017 was again a strong recruiting year with the addition of 7 senior managing directors and senior advisers in advisory, with a particular focus on our general industrials practice. Our strategy has enabled us to better serve our clients and to deliver the senior level, trusted and wide-ranging advice on which our clients depend.

We will continue to invest in best-in-class talent and believe that we are well positioned at the start of 2018. We have promoted 6 of our talented advisory managing directors to senior managing director, the largest group of internal promotions in our history. We did that earlier this month. We also announced the addition of an advisory senior managing director in the consumer sector, and we expect to announce the addition of another advisory SMD later this week. While it is still early in the year, it is quite possible that 2018 will be another year of significant investment in new talent as we look to deepen our footprint in key verticals and to continue to broaden and deepen our geographic capabilities.

In Equities, we remain committed to maintaining the highest level of excellence in research and client service. In 2017, our research team was once again very highly rated by Institutional Investor, third among all firms on an unweighted basis and second on a weighted basis to JPMorgan.

We continued to invest in the business, adding 2 senior research analysts in 2017, along with the addition of Mike Paliotta as CEO, who joined in the fourth quarter last year. In Investment Management, we completed the sale of the Institutional Trust and Independent Fiduciary business of ETC, eliminating a source of potential conflicts with our advisory business and further focusing our Investment Management strategy on wealth management. We ended the year with $9 billion of assets under management in our consolidated businesses.

Our strong results enabled us to deliver significant value to our shareholders, returning more than $361 million of capital in 2017 through increased dividends and the repurchase of 3.9 million shares at an average price of around $75.

Let me now briefly recap our firm-wide financial results. Evercore's full year 2017 results reflected very strong performance in our investment banking business globally as well as a reduced tax rate driven by appreciation in our share price. We delivered our ninth consecutive year of growth in both adjusted revenues and earnings.

For the year, we achieved record adjusted net revenues and adjusted net income of $1.626 billion and $276 million, respectively. 2017 adjusted earnings per share were $5.45, an increase of 26% over the same period last year. Without the benefit of the reduced tax rate, which is primarily in the first quarter of each year, EPS would have been up approximately 15%.

Adjusted operating margins were 22 -- 26.2%, excuse me, for the full year, with a full year compensation ratio of 58.5%. Our non-compensation ratio improved in 2017 at 15.3% of net revenues for the full year versus 16.3% in 2016. This is a result both of rising revenues and continued cost discipline.

For the quarter, adjusted net revenues were $465 million, a quarterly record up 5% versus the same period last year. Adjusted net income in the quarter was $78 million, with adjusted earnings per share of $1.55, in each case, the best fourth quarter in our firm's history. These results are up 5% and 8%, respectively, from the prior year.

The adjusted operating margin was 28.8% for the quarter, comparable to 28.7% from 1 year ago. The fourth quarter compensation ratio was 57.3% versus 57.2% last year, and the non-comp ratio was 13.8%, slightly down versus the same period last year.

Finally, let me comment for a minute on the recently enacted tax legislation. Overall, the updated tax code will provide a meaningfully positive impact to Evercore through a reduction in our ongoing tax obligations. If the tax code changes had been enacted at the beginning of 2017, Evercore's 2017 adjusted earnings per share would have increased by approximately $1. Bob will discuss the impact of the tax reform in greater detail in his remarks.

The increase in after-tax earnings provides us with additional capital to continue to invest in the capabilities to serve our clients as well as additional capital to invest in our strategic and financial objectives, including, very importantly, returning capital to our shareholders.

Let me now turn the call over to John, who will discuss the current market environment and comment on our advisory results.

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John S. Weinberg, Evercore Inc. - Executive Chairman [4]

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Thank you, Ralph. Market conditions for M&A remained favorable in the fourth quarter of 2017 as the drivers for a healthy level of activity remained in place: low interest rates, available credit, high equity prices, synchronized global growth and strong business confidence. Multiple catalysts, including strategic consolidation, activism and sponsor activity, all motivated client activity during the fourth quarter. This resulted in steady performance in key metrics. The number of transactions announced globally in 2017 increased 2% year-on-year, while dollar volume of announced transactions decreased 1% versus 2016.

Announced volumes declined 16% year-on-year in the U.S.; however, the number of transactions increased 13%. The decline in volume was driven by a decline in the announced value of transactions greater than $5 billion. While default rates remain at record lows, the size of the leveraged finance market is at record levels and continues to grow, sustaining restructuring activity across selected industries globally.

U.S. equity issuance increased 4% in 2017 relative to the prior year. U.S. equity trading volumes continued to decline in 2017 and were down 10% year-over-year. This trend, coupled with reduced research budgets and MiFID II regulatory changes, are creating headwinds in the sell side marketplace.

Let me quickly review the results of our advisory business in greater detail. First year -- first full year advisory fees were $1.3 billion, 21% higher than a year ago and the highest in our history. For the fourth quarter, advisory revenues of $374.8 million are up 8% year-over-year. The composition of advisory revenues for the quarter and the year reflected strong contributions from multiple sectors and capabilities. As Ralph mentioned, we are advising on the 2 largest M&A transactions of the year: Qualcomm Incorporated on Broadcom Limited's $129 billion unsolicited takeover; and the Board of Directors of Aetna in its $77 billion sale to CVS Health.

Capital Advisory grew rapidly as we experienced the strongest results in our history for our businesses focused on primary and secondary transactions for private equity and alternative investment firms. Underwriting revenues increased $44.7 million.

In restructuring, we continue to see opportunities concentrated in select industries, principally in retail and energy. We ended the year with 87 advisory senior managing directors. The productivity of our senior -- of our advisory senior managing directors globally for the 12 months ended 12/31/17 once again improved from year -- from the year-ago period.

Strategically, we expect to build on our momentum. With our recent talent additions as key sectors, such as industrials, we are now more -- we now more comprehensively cover the more important verticals in M&A, deepening the foundation of our advisory business. We also see the opportunity to add to our global strength and are particularly focused on increasing our scale in Europe.

Since the beginning of 2016, we've added 15 advisory senior managing directors on a net basis through promotions and recruiting. Our internal promotions have impacted our senior level coverage across a range of industry verticals, in particular industrials, health care and TMT.

In addition to boosting our sector coverage, we've also enhanced our Capital Advisory services. Similarly, senior level external recruits have strengthened a broad range of client offerings. We now have a market-leading strategic shareholder advisory group and activist-defense team. In addition, we added strength in capital markets, financial institutions, industrials and restructuring.

Geographically in Europe, we are in a position of strength, building upon our acquisition of Lexicon Partners with the steady addition of talent, both from external recruits and internal promotions. These new SMDs are actively working in -- to build pipelines and to add productivity, driving future growth. Of note, most of these senior managing directors are still in the ramp-up phase of productivity, with plenty of room to grow as they mature on our platform. We will continue to add talent, adding depth and breadth to the sectors we cover and the capabilities we offer to our clients.

As we look ahead to 2018, we continue to be encouraged by strong global economic growth; potential of strategic actions by our clients, given the U.S. tax reform; and by increased participation from financial sponsors. There is an expectation by many that 2018 will bring large cap and global cross-border M&A in a -- and drive the market as well as stronger volumes in Europe. Our backlog continues to be strong.

Now let me turn back to Ralph to address Equities and Investment Management.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [5]

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Thanks, John. Evercore ISI contributed net revenues of $63.9 million in the fourth quarter, including $7.3 million attributable to underwriting. For the full year, the business contributed net revenues of $226.1 million, including $21.4 million attributable to underwriting.

While Equities did benefit from the usual positive seasonal patterns in the fourth quarter, the overall environment continues to remain challenging due to a number of factors, including lower volatility, the continued shift from active to passive products and the evolving regulatory environment in Europe. We are working closely with all of our clients, including those that are affected by MiFID II to ensure that we provide the highest quality research, trading execution and client service.

We strongly believe that having excellent research capabilities and an excellent exit -- Equities business is fundamental to our investment banking strategy, making us more relevant to our advisory clients and placing us in a much stronger position than any of our independent advisory firm competitors to help our advisory clients navigate their relationship with the largest institutional investors globally.

The Investment Management business reported adjusted net revenues and adjusted operating income of $16.4 million and $5.2 million, respectively, for the quarter. For the full year, adjusted net revenues were $70.6 million and adjusted operating income was $19.2 million. The full year adjusted operating margin was 27.2%. These results predominantly reflect the contributions from our wealth management business in the U.S. and the strong performance of our investment in ABS.

Assets under management from consolidated businesses increased to $9 billion at the end of the fourth quarter, an increase of 12% from year-end 2016.

In 2017, we took additional steps to sharpen the focus of our Investment Management business by selling the Institutional Trust and Independent Fiduciary business of Evercore Trust Company, a sale which closed in the fourth quarter. As we have said consistently, our focus continues to be in this sector on building our Wealth Management business and on enhancing our money management business in Mexico.

Bob will now discuss our GAAP results and several other financial matters. Bob?

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [6]

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Thank you, Ralph. Net revenues on a GAAP basis were $540 million for the quarter and $1.7 billion for the year, adjusted both a record as they were a record on an adjusted basis. Following the impact of adjustments related to the Tax Cuts and Jobs Act in the fourth quarter, we incurred a net loss attributable to Evercore Inc. and a loss per share on a GAAP basis of $19.4 million or $0.50 for the fourth quarter, respectively. Net income attributable to Evercore Inc. and earnings per share were $125 million or $2.80 for the year, each a record for a full year GAAP purposes.

Consistent with prior periods, our adjusted results for the quarter exclude certain items that are directly related to our acquisitions and dispositions, including costs related to our Equities business. As in prior quarters, we adjusted our costs associated with divesting of LP units and interests, granted in conjunction with the ISI acquisition. For the quarter, we expensed $2.7 million related to the Class E LP Units and $3.7 million related to the Class J LP Units. The performance for the final tranche of the Class G LP Interests ended December 31 of this year and the performance target was not achieved.

On December 31, 2017, we restructured our investment in G5, our affiliate in Brazil such that, going forward, this investment will no longer be accounted for under the equity method. This transaction resulted in the reclassification of $16.3 million of cumulative foreign currency translation losses from other comprehensive income, which is reported in -- within stockholder's equity, to a reduction in other revenues in the fourth quarter in our U.S. GAAP results.

As Ralph mentioned, we sold the Institutional Trust and Fiduciary business of Evercore Trust Company in October. This, following closing adjustments, generated a pretax gain of approximately $8 million in the fourth quarter in our U.S. GAAP results. In conjunction with the sale transaction, our U.S. GAAP results also reflect $3.9 million of special charges, principally associated with [transition of] employees of that business.

Moving on to taxes. Our GAAP tax rate for the quarter was 100.7% as compared with 32.4% in the prior quarter and 40% in the same period last year. Our GAAP tax rate was 59.1% for the full year as compared to 44.5% for 2016. As was noted previously, these rates for the fourth quarter and full year of 2017 were impacted by the enactment of the Tax Cut and Jobs Act in December, which resulted in a decrease in future income tax rates in the U.S. Consequently, our tax provision on a U.S. tax basis for the quarter includes a charge of $143.3 million, which primarily represents the estimated remeasurement of our net deferred tax assets, principally associated with temporary differences from the step-up in basis associated with the exchange of partnership units, deferred compensation, accumulated other comprehensive income and depreciation of fixed assets and leasehold improvements.

This charge as well as a related reduction in the liability for amounts due pursuant to our tax receivable agreements of $77.5 million, which is reflected in other revenue on a U.S. GAAP basis, resulted in an increase in our effective tax rate of 59.3 percentage points for the quarter or 27.1 percentage points for the full year from what those rates would have otherwise been.

Likewise, our adjusted effective tax rate, which excludes the impact of the enactment of the Tax Cuts and Jobs Act, was 37% for the quarter compared to 37% for the prior quarter and 38% in the same period last year. The full year adjusted effective tax rate is 31.3%, which compares to 38% for 2016. The impact of the new accounting for stock compensation, which was principally reflected in the first quarter resulted in a decrease in the adjusted effective tax rate of 0.4 percentage points for the quarter and 6.4 percentage points for the year.

Lastly, assuming the level and geographical mix of earnings in 2018 is comparable to 2017 and our share price on the vesting date for prior equity grants is at or near 2017 levels, we would expect our adjusted effective tax rate to be approximately 21%, reflecting the lower tax structure of the Tax Cuts and Jobs Act. The adjusted effective tax rate would be approximately 25%, excluding any impact of share price changes on the deduction associated with share-based compensation.

Trying to wrap up, non-compensation costs -- on a full year basis, the non-compensation costs per employee were approximately $153,000 in 2017, flat to prior years. The Q4 adjusted earnings share -- the adjusted share count for earnings per share was 50.4 million shares, higher in comparison with the prior quarter, driven principally by the higher share price in the quarter and the normal amortization of shares under U.S. GAAP. We did not repurchase any shares in open market transactions in the fourth quarter.

On a GAAP basis, the share count was 39 million shares for the quarter. As Ralph mentioned, we repurchased 3.9 million shares or units at an average cost of $75.02 for the year, more than offsetting the shares issued for year-end compensation and to attract talent over the past 12 months.

We did not draw from the $30 million line of credit during the quarter. Our cash position remains strong at the end of the year. We hold $738 million of cash and marketable securities at December 31, with current assets exceeding current liabilities by approximately $536 million.

Let's now turn the call back to Ralph.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [7]

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Let me close with a couple of thoughts. First, as John mentioned, as we enter 2018, the environment is very good for our business. At this time, all of the conditions are in place for another strong M&A year. Obviously, we can't predict the future, but the conditions that are in place today should support another strong year in our advisory business.

Second, the investments that we have made and continue to make in new talent and new capabilities should position our firm for another year of growth in market share, something that we have been able to achieve in each of the last 9 years.

Finally, we are unique among all independent firms in the breadth of services that we offer to our clients. We strongly believe that the broad array of services that we offer our clients will continue to support our industry-leading productivity.

We'll now open the floor for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Brennan Hawken with UBS.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [2]

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Just wanted to follow up, Ralph, on one of the comments that you had made on -- in both the prepared remarks and in the release on the plans to invest a portion of the tax benefits on capabilities. So you guys highlighted last year, before we got tax reform, that you were intending to increase hiring. So I'm just trying to differentiate -- understand whether there's any change of plans now? Or really, this is just an extension of how you were already thinking of approaching the business?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [3]

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I would look at it as an extension of how we were already approaching the business. Obviously, we have more free cash flow. But this is not a firm that says, "Okay, if free cash flow goes up 20%, investment in people has to go up 20%." We're going to make the right investments that are consistent with building long-term shareholder value in this company based on the -- our judgments with respect to that. And those will be essentially unaffected by the change in the tax code.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [4]

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Terrific. Very clear. And then my follow-up would be on thinking about 2018 -- and again, Ralph, you sort of set me up here in some of your comments at the end there saying that you continue to expect to grow market share here in the year, which is certainly encouraging, especially on the back of the strong market share gains here in 2017. So when we look at the flawed metrics that we've got in the public pipeline data and thinking about how that might translate into the profile of revenues for the year, and I know you guys just love to comment on this type of stuff, but I'm going to try anyway. First half '18 looks probably a bit softer and then with -- based on announcement activity, the likelihood of a stronger pickup and a stronger finish to the year -- just at a high level, is that generally how we should be thinking about modeling you guys? Or is there something else going on that might cause that to be an even worse indicator than it has been in the past?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [5]

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Well, Brennan, at a high level or at a low level or even a middle level, we're not really going to help you on that. So 100,000 feet right on the ground or 50,000 feet. I think John spoke accurately that our backlog is strong. And as you well know, the publicly available data does not always mirror the -- what we -- the breadth of our backlog. It's as simple as that.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [6]

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Sure. That's fine. Then let me just phrase it a different way. Your fourth quarter results were a lot stronger than we were modeling certainly from the public data. Were there contributions from restructuring? What were some of the contributions from the businesses that we might have trouble, at least from a historical context, so then maybe we can frame how to think about things in the coming months better?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [7]

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I would say that the fourth quarter strength was pretty much across the board, both within the advisory business by geography and by industry, and in our capital raising businesses. So it was a -- each of the -- and restructuring also had a decent quarter. So it was the firm doing what it's supposed to do.

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Operator [8]

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Our next question is from Mike Needham with Bank of America Merrill Lynch.

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Michael Anthony Needham, BofA Merrill Lynch, Research Division - Associate [9]

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I was hoping to, I guess, chill down on some of the comments you made about tax reform. Clearly, your go-forward tax rate is going to be higher, cash generation is going to be higher. And it sounds like you might do a mix of like capital return and reinvestment. To the extent that you have like a list of things that maybe you didn't have the cash to commit to in the past, what are those couple of things on the list, specific things that you would allocate that money to over the next few years?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [10]

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Let me be really clear on this. Each year -- we have never been, in our view, constrained by cash in terms of the investments that we can make, whether it was at a -- the old tax rate or at the new tax rate. I think many of you have followed us for a long enough period of time that we have a set of priorities in terms of capabilities that we want to build. When we find A+ talent that meet those requirements or those objectives and we're able to convince them to join us, we hire them. And if we can't find A+ or A talent, we wait. That -- the fundamental thing that drives our investment decisions is our ability to find A+ or A talent that is -- will be able to perform on our platform and that is amenable to joining us. I think I've said since I started doing these calls almost 9 years ago that when we do have an opportunity, as we did last year, to invest a little bit more in talent because of the availability of talent, and in some cases, the expensive talent, we're going to do that. And having -- not withstanding that, we've kept the compensation ratio, which is ultimately -- reflects those investments in a relatively narrow range, mid- to high 50s. Ultimately, I think that's -- certainly, we expect that to continue to be our objective. And look, we're not going to -- we have consistently had a policy of excess cash flow being returned to our shareholders in the form of dividends and share repurchases. And I don't think you -- that you should expect any change in that policy.

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Unidentified Company Representative, [11]

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That's right.

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Michael Anthony Needham, BofA Merrill Lynch, Research Division - Associate [12]

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Okay. And the other, just on the activist-defense, it sounds like the pipeline is pretty good. Can you talk about the -- I guess, how the fees in that business compare to merger advice? And I'm just trying to get a sense for it's a pretty big number you guys gave for the pipeline, how much of a contribution that might be this year?

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [13]

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Well, clearly, a very strong activist-defense business gets us into many situations. Last year, I think you saw that we were involved in the Whole Foods defense, which ended up in the long run being part -- we were then part of selling whole foods to Amazon. The comparison of activist-defense fees really is -- it is quite variable. And as you could imagine, there are many different types of activist advisory business that we can have. In some cases, it's an advisory business where nothing really is ongoing. In other cases, something very hot is happening, and we're very much in the middle. So fees go up and down. The only thing I would say with respect to the activist-defense and the merger fees is that it's very much -- it's a product of the activity level generally in the market. And when the activity level is high, those build. And from our perspective, it's a -- the activist and defense business has been a very good business for us. It puts us in the middle of a lot of different situations, opens lots of doors for clients. And therefore, it really contributes to the overall profile we have with clients and allows us to really play a larger role with the strategic bearing for a client.

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Operator [14]

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Our next question is from Devin Ryan with JMP.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [15]

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Maybe a question here on just European expansion. So obviously, the European M&A markets have really hardly recovered post-financial crisis compared to healthier markets elsewhere. It does seem to be positioned better here moving forward. But expansion in Europe is clearly going to be a priority for Evercore over the next several years. So I'm just trying to maybe get a little bit better sense of how you guys would frame the upside potential in Europe as a market. And then also from a market share perspective, how you feel like Evercore is positioned? And then how much bigger you can be? If you maybe -- you talk about your market share as a firm, the overall market, but how you feel like you are in Europe as a market share and what that can go to?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [16]

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Well, I think you're correct that if you look at our business compared to the 2 other firms that do well in excess of $1 billion in advisory revenues, we are the strongest in the U.S. and both of those firms have stronger businesses in Europe. Now I would argue that's not terribly surprising since -- for two reasons: number one, one of them has been in business for roughly 165 years and the other for roughly 205 years; and second, they were both born in Europe. We have by far the largest European business among the U.S.-began independent firms. So the gap between the historical European firms and Evercore represents clearly an opportunity for us. Our approach to that is going to be exactly the same as it has been here in the U.S. in trying to fill our capabilities in certain sectors. I think probably since I've started on these calls, we've talked about the importance -- our desire to deepen our capabilities and strengthen our capabilities in the general industrials and the consumer sector. And last year, we made some really important hires in general industrials. And this year, we've made an important hire in the consumer sector. So Europe is very much on our radar. But once again, we will -- the pace of those investments will be driven by the availability and the amenability of talent joining us, not -- we are just not a firm that says, "We have to be in this sector in Europe, and we're going to hire the best athlete we can find." We're a firm that waits to get someone that we're highly confident will be productive on our platform.

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John S. Weinberg, Evercore Inc. - Executive Chairman [17]

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Said a different way, we are focused on Europe, but we're going to grow responsibly. And as has been the practice of the firm, as Ralph said, we really only hire people who we think are A+ players. And as a result, it may take time. But we're very focused on thinking about our footprint in Europe -- expanding our footprint in Europe. We have a very good business there now, and we just plan to add on to it.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [18]

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Okay. Terrific. Follow up here would just be on the restructuring business. And I caught the remark that the business performed well in the quarter. And so I'm just trying to get a sense of is that energy running its course or whether you're seeing other types of activity there? And just how you're feeling about that business more broadly over the next year or 2 here in the back half that we're in? Because, obviously, you report overall advisory results, you can break it up by business. I'm just trying to think about how high that bar is to overcome from what sounds like a pretty good '16 and '17 in the business?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [19]

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Well, I guess, I'd make a broader statement, and that is, our shareholders are very fortunate to own a diversified portfolio of geographies, industries and product capabilities. And in the past, people have gotten a little bit hung up on a couple of years ago, it was -- yes, we have a good energy practice and energy prices were weak. Doesn't that portend a weak year for Evercore? And the answer to that ultimately turned out to be, and by the way, we were somewhat prescient in saying that to all of you that energy activity moved from M&A to more restructuring. And quite honestly, we didn't see much of a decline in our energy revenues in the year that was in question, I think it was 2016 if I recall correctly. So we have a really diversified business. It's diverse by geography, it's diverse by industry. Interestingly enough, it's diverse by people. Every once in a while, somebody has something going on in their life, an illness or something, that causes their productivity to fall off a little bit in that year. And so I honestly wouldn't get particularly hung up on this product or that product or this sector or that sector. What drives our business more than anything is the overall environment. And it does affect different sectors in different ways. And we -- as we always have, we're not going to give you granularity on sectors and products and revenues by each of those. But none of these things is, as we look forward at the beginning of 2018, is a sufficiently material headwind that we would sit here and say -- that would cause me to recant the closing remarks I made.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [20]

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Got it. Understood. Well, appreciate the perspective. And congratulations on 9 years of growth. I think that might sum it up.

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Operator [21]

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Our next question is from Conor Fitzgerald with Goldman Sachs.

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Conor Burke Fitzgerald, Goldman Sachs Group Inc., Research Division - VP [22]

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Just looking to get an update on how some of the conversations you're having with clients on potentially pursuing M&A has changed post-tax reform? And if you could give us a sense of where the outlook for M&A has changed most over the last, say, 6 months ago by sector or geography, that would be helpful as well?

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John S. Weinberg, Evercore Inc. - Executive Chairman [23]

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Well, I think that clearly tax reform has, if nothing else, built on confidence levels that we've -- that we already saw were strong going into the end of the year. There is no question that there are many companies that are looking at a buildup of cash. And there's also, I think, very importantly, this combination of a buildup of cash plus a view that the synchronized recovery around the world is going to just be good for business activity. So there's no question that it's -- that people are, if anything, even more confident than they've been -- decision-makers, that is. In terms of geographically, I think that you really will see it across the board. I think Europe is definitely in a recovery mode. The confidence levels and the activity levels in Europe by all indications seem to be strong. And I think that you will see that evidence itself. I think that in terms of sectors, most of the sectors are feeling good. Obviously, there are -- there's lots of conjecture, and you saw in January some activity where in the healthcare sector, in pharma specifically, there is a view that you can bring cash back and that would -- that will actually have -- give people more flexibility. So what I would say is that, if anything, the tax scenario has improved what was already a quite strong mental headset with respect to strategic inorganic growth that's really being felt worldwide. In the U.S., we believe there will be -- as we said, there will be activity. And many say, it'll grow, and it's hard to point to anything that says that's not true. And clearly in Europe, there's a recovery mode and a lot of the important players in Europe are really starting to say they're ready to really engage more seriously. So it's really across the board, actually.

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Conor Burke Fitzgerald, Goldman Sachs Group Inc., Research Division - VP [24]

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John, that's helpful. And then just -- are you hearing any concerns about valuation comp now more than you did, say, 12 months ago? That's obviously been a debate in the equity markets to start the year, just given the strong performance. Any hang-ups you're hearing from corporates there about pursuing M&A, just given where valuations are?

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John S. Weinberg, Evercore Inc. - Executive Chairman [25]

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There is no question that as the market goes up, things get more pricy. Frankly, as people have more cash and as there is more optimism, that probably drives up prices also. Frankly, we don't see any hesitation with respect to -- that the market is too pricey for strategic M&A different than what there was in the past 4, 6 months. There is always an evaluation as to whether paying a certain price still yields the right hurdle rates to do acquisitions. As prices get higher, those -- that analysis starts to actually have people consider things differently. But right now, we don't see levels at the point where people are hesitating. They're looking at it with the same kind of optimism. Now not every company who has an acquisition target is going to pay the price that, that acquisition target will need to be paid for to get. But I think, over time, what you're seeing is that corporate management teams feel like the levels are solid, that they're not hesitating because of the levels. And I think that really, right now, you have a pretty good set of factors that really invite for the M&A activity to be robust.

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Conor Burke Fitzgerald, Goldman Sachs Group Inc., Research Division - VP [26]

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That's very helpful. And then, Ralph, just one quick follow-up for you. Appreciate all your comments and clarifying remarks you've made around reinvesting in the business post-tax reform. Just the one clarification there, were any of your comments about reinvesting in the business about sharing some of the benefits of tax reform with your existing employees?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [27]

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I think what we do and have done every year since I've been here is we've paid our employees competitively with the marketplace. And we have had virtually no turnover in terms of people, voluntarily of their own volition, leaving Evercore to go to other firms in our industry. Obviously, people from time to time decide this is not the industry in which they work. We're going to continue to compensate our employees competitively regardless of the tax rate.

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Operator [28]

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Our next question is from Steven Chubak with Nomura.

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Steven Joseph Chubak, Nomura Securities Co. Ltd., Research Division - Former VP [29]

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I wanted to start off with a question on capital management. And Ralph, I appreciate the comments on maintaining a discipline surrounding investment and growing responsibly, even with the tax benefit, but I'm just wondering, in light of the tax windfall, whether your capital management priorities have changed at all, just in terms of how you're thinking about buyback or potential M&A? And I'm wondering at these levels, whether you have any appetite to accelerate share repurchase, to maybe even drive the share count lower just given the positive commentary around the outlook as well as the tax windfall?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [30]

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I think we've been very consistent for 9 years. We make investments that we feel will generate an increase in the per share value of this company 2 to 3 years down the road. And that's how long it takes for these investments to either produce positive returns or to turn out not to be successful. We are in the unusual position, which I guess, now every company's going to be in, that all of our investments pass immediately through the income statement because they're people investments. So we've been very clear that, as was the case last year, that when we see an unusually high level of opportunity to make investments, we're going to make those investments because we genuinely believe that they will increase the per share value of the company 2 to 3 years down the road. After those investments, we have consistently returned more than 100% of our free -- of our earnings and roughly 100% of our free cash flow to our shareholders in the form of dividends and share repurchases. I honestly don't see any change in what we've done historically caused by the tax legislation.

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [31]

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And Steven, just to add a point on repurchases, we've been very explicit that it's our objective to offset the dilution that comes from bonus equity grants and investment in new hires through repurchases, and we remain absolutely committed to doing that.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [32]

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And the share count does bounce around a little bit, and Bob can explain why.

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [33]

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Oh, please, not on this call.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [34]

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In response to the share price. But if you actually -- if you added up shares outstanding and RSUs that are vested or unvested or pending, the share count has not been growing, it's been growing because of the increase in the share value.

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [35]

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Take his word.

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Steven Joseph Chubak, Nomura Securities Co. Ltd., Research Division - Former VP [36]

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No, I appreciate that dynamic. And I even more appreciate the fact that Bob didn't go through it on the call.

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [37]

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I do too.

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Steven Joseph Chubak, Nomura Securities Co. Ltd., Research Division - Former VP [38]

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Okay, just one more for me on the underwriting business. I guess, taking a step back and looking at the strong revenue momentum you've seen across, not just traditional M&A but even the ancillary businesses, such as restructuring and Capital Advisory, that really strikes us as the one area where, in relation to the target that you outlined at the time of the ISI deal, that you're still punching below your weight, so to speak. And I'm just wondering, has your thinking evolved in terms of the revenue opportunity in that business? And is that one of the areas where you're maybe looking to make additional personnel hires or investment in order to gain additional market share?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [39]

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I would agree with your characterization that it's been slower -- the underwriting business, specifically, has been slower to ramp up than we had hoped. And we are selectively adding talent in our advisory business where -- and a little bit in the Equities business as well, in the sectors where we believe there will be high primary and secondary equity activity. 1 month doesn't a quarter or a year make, but certainly, the indications for the first quarter -- for the first month of this year would suggest we're starting to see a little bit of a benefit from those investments. I would say one thing that we probably underestimated was the virulence of the people -- the firms with whom we compete in that business to maintain their position. And I think probably some of that is a function of the fact that, if there is a -- the underwriting spread is ultimately a -- it's a zero-sum game. If we go from 5% to 10% or 10% to 15% or 10% to 20% of the underwriting spread in a particular transaction, somebody else is going in the opposite direction by exactly the same amount. I would contrast that to the advisory business, where if we're co-adviser with a large firm, the total fees aren't 2x, but they're not 1x either. And so there are probably no more protective people in this entire industry than the prognosticators in equity syndicate.

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Operator [40]

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Our next question is from Vincent Hung with Autonomous.

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Vincent Hung, Autonomous Research LLP - Partner [41]

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It looks like the seasonality of equity commissions from 3Q to 4Q looks to be higher than in previous years. Is there anything to call out there?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [42]

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It was comparable.

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Vincent Hung, Autonomous Research LLP - Partner [43]

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Got it. And any color around the impact from MiFID II that you've seen, now that it's implemented?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [44]

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It's too early to tell, really. I mean, I think we -- there's nothing that's happened that would -- on the call last quarter, we said we expected that the overall pool of payment for research by institutional investors would decline, but that we expected because of the quality of our research, our market share would increase. And how that would ultimately affect the aggregate level of revenues, we weren't sure, and I don't think we have anything -- enough data at this point to make a further observation.

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Operator [45]

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Our next question is from Ann Dai with KBW.

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Yian Dai, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant VP of Equity Research [46]

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I had a couple more questions for you on the Equities business, the first being around comp. So as we look at and think about the last tranches of ISI lockups vesting, can you just take us through your thought process behind compensation in that business? And how you ensure retention of key players as lockups come off? It just seems like it's still a very competitive environment for top talent despite the pressure to the commission pool. So is there some sense that you have to re-up those longer-term incentives or provide guarantees of some sort? And is that already incorporated in the higher comp ratio that you moved to earlier this year?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [47]

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I think we're very comfortable that we are competitively compensating the people in the Equities business.

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Yian Dai, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant VP of Equity Research [48]

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Okay. And also on the trading side, could you just talk a little bit about the decision to shut down your European trading desk? Really, what impacts were you seeing as MiFID went into effect? And what was the cost-benefit analysis in making that decision?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [49]

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Pretty simple. We didn't have sufficient volume there to justify the level of personnel. And by the way, this was a pre-MiFID observation which was only -- not even accelerated, but highlighted by MiFID.

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John S. Weinberg, Evercore Inc. - Executive Chairman [50]

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And Ann, to just amplify a little on Ralph's comments, the substantial preponderance of execution service that we provided to those clients was in U.S. securities. And we continue to do that. The action in London really focused on executing in European names where we were subscale.

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Yian Dai, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant VP of Equity Research [51]

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Got it. And is there any kind of meaningful cost save? Or any impact to run rate going forward on expenses?

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John S. Weinberg, Evercore Inc. - Executive Chairman [52]

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It's such a small part. I wouldn't characterize it as meaningful.

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Operator [53]

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Our next question is from Jim Mitchell with Buckingham Research.

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James Francis Mitchell, The Buckingham Research Group Incorporated - Research Analyst [54]

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Maybe just a quick question on the -- you talked about financial sponsors potentially being a bigger part of '18 and beyond. How do we think about -- I think I've had some questions from investors about higher interest rates and how that impacts the business. It does seem to me that historically there hasn't been much correlation, but just maybe your perspective on how higher interest rates could affect deal flow if we were to see that happen this year?

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [55]

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Well, there is no question that interest rates do affect financing. A very big part of the decision making for financial sponsors really is, can they make their returns? And so much has to do in each specific case about each particular investment, and when they look at how they make -- how they look forward in that investment, the things that they can do to improve that investment, can they reach their returns given the costs that they undertake, interest being a big part of that? As you know, there is a very large pool of capital that has been collected and is -- and has actually been relatively quiet. As prices have gone up, sponsors haven't been buying. Having said that, there is this huge pool of capital that is ready to go to work. I think that every single deal, every -- each institution makes an independent decision about whether they can reach those returns. Interest rates, if they go up, will have an impact on the costs. But as we've seen historically, the private equity business goes throughout the cycle, and that just because expenses go up or costs go up from interest rates doesn't stop that. A lot of it depends on the business environment and whether businesses will actually improve. And some of that has to do with business activity. So as we've talked about the recovery around the world of businesses and the volumes that businesses are able to drive, that will have somewhat of an offsetting impact to the cost of interest. So I would just say that, generally, you can't really make a generalization other than to say that strong business environments definitely invite increased activity and sponsors will I think follow up on that.

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James Francis Mitchell, The Buckingham Research Group Incorporated - Research Analyst [56]

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Okay, that's helpful. And maybe just a more -- a question on the comp ratio. I appreciate sort of the range you target in the long term. But as we think about another potentially large investment year and new hires in '18, can you at least kind of hold the line with this -- '17? Or how do we think about the comp ratio in the more nearer term?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [57]

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I think we'll have a view on that in the next quarter.

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Operator [58]

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Our next question is from Jeff Harte with Sandler O'Neill.

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Jeffery J. Harte, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [59]

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I guess a little bit of a follow-on of the sponsor question. When we're thinking about tax reform, are there any specific sectors in which you'd expect to see kind of like disproportionately large kind of fit?

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John S. Weinberg, Evercore Inc. - Executive Chairman [60]

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Well, I think we -- in the earlier answer, we were talking about the fact that there is certainly some trapped cash in overseas that is coming back and that really impacts health care to a large extent.

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Unidentified Company Representative, [61]

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And tax.

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John S. Weinberg, Evercore Inc. - Executive Chairman [62]

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Also in tax, the same thing. I think all -- it's really a company-specific impact across the board. And I think there's no reason to believe that if companies have more cash and access to cash that they won't really be able to act on whatever strategic goals they have. So without really going any further in terms of trying to prognosticate the future, really what I would say is that there's just no question that across the board in most sectors, there is more capability to do things because of the fact that people have more cash. And it then comes down to individual management teams and their objectives and their aspirations and their confidence level with respect to their business.

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Jeffery J. Harte, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [63]

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Okay. And can you help us quantify the size of the addressable market for advisory fees? I guess, I've kind of come back to them. I struggle a bit with market share expansion potential going forward, now that you guys are as big in the top 5 [place] as you are.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [64]

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Okay. The only thing we can observe is the public companies that report their advisory fees separately. That's every single large firm, with the exception of Barclays, which for some reason chooses not to do that, and all of the public independent firms. So when we say we go from 6% in 2016 to 6.7% at least in 2017, that's what we're doing. No more, no less. When we look at our market share among the independent firms, it's Evercore's revenues over the revenues of the other public independent firms. There is really no good place to get data on the aggregate advisory fee pool. And the -- what all of you struggle with is that there are these sources like Thomson Reuters and Dealogic, but they're -- they show a relatively small portion of the aggregate pool and aren't particularly helpful.

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Operator [65]

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There appear to be no questions at this time. I would now like to turn the floor to Ralph Schlosstein for any closing comments.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [66]

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All right. Thank you very much. You took 5 minutes longer than normal, so hopefully that won't show up as lower earnings in this first quarter. See you guys.

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [67]

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Thanks, everyone.

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John S. Weinberg, Evercore Inc. - Executive Chairman [68]

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Bye.

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Operator [69]

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This concludes today's Evercore Fourth Quarter and Full Year 2017 Financial Results Conference Call. You may now disconnect.