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Edited Transcript of HLI.N earnings conference call or presentation 29-Oct-20 9:00pm GMT

·29 min read

Q2 2021 Houlihan Lokey Inc Earnings Call LOS ANGELES Oct 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Houlihan Lokey Inc earnings conference call or presentation Thursday, October 29, 2020 at 9:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Christopher M. Crain Houlihan Lokey, Inc. - MD, General Counsel & Secretary * J. Lindsey Alley Houlihan Lokey, Inc. - MD & CFO * Scott Lee Beiser Houlihan Lokey, Inc. - CEO, Senior MD & Director ================================================================================ Conference Call Participants ================================================================================ * Brandon Tyler Reagan Wolfe Research, LLC - Research Analyst * Brennan Hawken UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials * Devin Patrick Ryan JMP Securities LLC, Research Division - MD and Equity Research Analyst * James Edwin Yaro Goldman Sachs Group, Inc., Research Division - Research Analyst * Kenneth Brooks Worthington JPMorgan Chase & Co, Research Division - MD * Manan Gosalia Morgan Stanley, Research Division - Equity Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Houlihan Lokey Second Quarter Fiscal Year 2021 Earnings Conference Call. (Operator Instructions) Please note that this conference call is being recorded today, October 29, 2020. I'd now like to turn the call over to Christopher Crain, Houlihan Lokey's General Counsel. -------------------------------------------------------------------------------- Christopher M. Crain, Houlihan Lokey, Inc. - MD, General Counsel & Secretary [2] -------------------------------------------------------------------------------- Thank you, operator, and hello, everyone. By now, everyone should have access to our second quarter fiscal year 2021 earnings release, which can be found on the Houlihan Lokey website at www.hl.com in the Investor Relations section. Before we begin our formal remarks, we need to remind everyone that the discussion today will include forward-looking statements. These forward-looking statements, which are usually identified by use of words such as will, expect, anticipate, should or other similar phrases, are not guarantees of future performance. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. And therefore, you should exercise caution when interpreting and relying on them. We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. We encourage investors to review our regulatory filings including the Form 10-Q for the quarter ended September 30, 2020, when it is filed with the SEC. During today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating the company's financial performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our earnings release and our investor presentation on the hl.com website. Hosting the call today, we have Scott Beiser, Houlihan Lokey's Chief Executive Officer; and Lindsey Alley, Chief Financial Officer of the company. They will provide some opening remarks, and then we will open the call to questions. With that, I'll turn the call over to Scott. -------------------------------------------------------------------------------- Scott Lee Beiser, Houlihan Lokey, Inc. - CEO, Senior MD & Director [3] -------------------------------------------------------------------------------- Thank you, Christopher. Welcome, everyone, to our Second Quarter Fiscal 2021 Earnings Call. We have successfully been working primarily from home now for a little over 7 months, and our firm has been blessed with very few cases of COVID-19. This pandemic has had a terrible effect on families around the world, and we continue to do everything we can as individuals and as a firm to help. We have engineered our business and personal work styles as best as we can in order to provide a safe and successful work environment for our employees, clients and shareholders. Notwithstanding the ongoing challenges, the firm produced solid quarterly results. Our second quarter fiscal 2021 revenues were $276 million, slightly up from last year and significantly improved from the $211 million reported in the first quarter. Our adjusted earnings per share were $0.75, up 7% from last year and a major improvement from the $0.56 reported in the first quarter. Our second quarter benefited from a significant increase in closings and financial restructuring, very strong capital markets and an improving M&A and valuation market. Currently, the overall economic environment is very conducive to our balanced business model. Our financial restructuring results are at record levels, and we expect to experience elevated levels for some time. Meanwhile, the favorable interest rate environment and stable asset valuations over the last few months have prompted strategic firms and sponsors to reenter the M&A marketplace. This has led to improved deal closings versus Q1, but more importantly, to a substantial increase in new business activity, which should have a positive impact on subsequent quarters. Tempering our outlook. We still have concerns about the pandemic's ongoing influence on world economies, the uncertainty in the U.S. elections and the ultimate outcome of Brexit. That being said, today, we feel more confident about our business prospects than earlier this year. Our financial restructuring business reported $125 million in quarterly revenues and $214 million for the first 6 months of our fiscal year. We have more mandates today than we did during the Great Recession, but there are only a limited number of mega-size restructurings relative to then. We have closed a record 59 deals year-to-date, and the number of active assignments is at record levels. New business activity remains at elevated levels, but the pace of new business in the second quarter slowed from the torrid pace exhibited at the outset of the pandemic. As I mentioned on our last call, we expect short-term restructuring results to be lower than originally anticipated at the outset of the pandemic, but we expect that we will experience elevated levels of restructuring revenues for longer than originally anticipated. Our Corporate Finance business has dramatically improved from the first quarter. In the second quarter, we reported $108 million in revenues versus $88 million in the first quarter. Consistent with revenue growth, we closed 53 deals in the second quarter versus 35 deals in the first quarter. Furthermore, this quarter, we experienced a record level of new business activity. However, it will take some time for this new business to translate into revenues. New business activity is being generated from both corporate and private equity clients. Business is also fairly diversified across our industry groups. Many of the transactions we previously described as on hold are now active again, and the number of new inquiries has accelerated since mid-summer. As mentioned earlier, there are still several macroeconomic factors that may eventually have an impact on close rates for our new engagements. Our Financial and Valuation Advisory business is experiencing many of the same favorable trends as Corporate Finance. Revenues in the second quarter were $42 million versus $35 million in the first quarter, and up from $40 million in the same period last year. The number of quarterly fee events, average fee size and revenues per MD are now similar to last year's results. Our portfolio valuation segment continues to exhibit strong growth, and we are experiencing improvement in our transaction opinion business as well. Turning to our acquisition activity. In August, we closed on our previously announced acquisition of MVP Capital, and they are off to a great start. We continue to be in active dialogue with several potential acquisition targets. However, the intensity of our discussions has tempered since the last quarter. The rebound in global M&A activity over the last several months has encouraged some firms to remain independent and other firms to increase their valuation expectations to levels we believe are unsupported. That being said, our acquisition strategy has always been to be patient and to find the right firms for the right reasons at the right price. In closing, we have experienced significant changes in the overall business environment, from the positive outlook at the start of this calendar year, the pessimistic outlook this spring, to the rapidly improving market that exists today. We welcome change and, in most instances, may thrive in it. Our commitment to shareholders and employees is that we will continue to build our balanced business model to mitigate the effects of volatility in the results. And with that, I'll turn the call over to Lindsey. -------------------------------------------------------------------------------- J. Lindsey Alley, Houlihan Lokey, Inc. - MD & CFO [4] -------------------------------------------------------------------------------- Thank you, Scott. Revenues in Corporate Finance were $108 million for the quarter compared to $156 million from the same period last year. Total revenues were a result of a decline in the number of closed transactions as well as a slight decrease in our average transaction fee on closed deals. Financial restructuring had a strong second quarter, delivering $125 million in revenues, a 62% increase from the same period last year. Higher transaction volume and higher monthly retainer fees drove the increase in revenues. We closed 30 transactions compared to 17 in the same period last year, and the increase in the retainer fees is a result of a significant increase in the number of current engagements driven by the pandemic. In Financial and Valuation Advisory, revenues were $42 million for the quarter compared to $40 million for the same period last year. We had 539 fee events during the quarter compared to 523 in the same period last year. Overall, FVA saw improving results across its service lines with portfolio valuation leading the way, which contributed to solid quarterly results. Turning to expenses. Our adjusted compensation expenses were $175 million for the second quarter versus $165 million for the same period last year. We had one adjustment this quarter for deferred payments related to certain acquisitions. Our adjusted compensation ratio was 63.5% for the quarter, which is above our long-term target for adjusted compensation ratio of between 60.5% and 61.5%. Our year-to-date compensation ratio is 63.1%, which reflects a reasonable proxy for the balance of the year. This increase in compensation expense ratio over our targeted range is primarily a result of our estimate that reimbursable expenses for fiscal 2021 will be significantly lower than last year's. Our compensation expense ratio is tied to gross revenues, which is calculated as fee revenues plus reimbursable expenses. While we pay compensation based on fee revenues, our compensation expense ratio increased to account for the lower reimbursable expenses incurred as a result of the COVID pandemic. Our adjusted noncomp expenses were $29 million for the quarter versus $44 million for the same period last year, a decline of 35%. This resulted in an adjusted noncompensation expense ratio of 10.4% versus 16.2% in the same quarter last year. This decline is a direct result of lower travel, meals and entertainment expenses and lower marketing, office-related and other operating expenses, all reduced due to the stay-at-home orders implemented because of the pandemic. We expect to continue to see significantly reduced noncompensation expenses in these 2 categories at least through the balance of the fiscal year. This quarter, we adjusted 3 items out of our noncompensation expenses, $1.3 million in acquisition-related costs for our acquisition of MVP Capital; $900,000 in acquisition-related amortization; and $700,000 in Oracle ERP implementation costs, which we successfully rolled out this quarter. The new Oracle ERP system replaces a 20-year-old system and represents the backbone of our financial and accounting system. Our adjusted other income and expense decreased for the quarter to income of approximately $200,000 versus income of $1.1 million in the same period last year. This was primarily a result of lower interest earned on our cash and investment balances. Our adjusted effective tax rate for the quarter was 27.3% compared to 28.4% during the same period last year. The adjusted effective tax rate is at the lower end of our long-term target range of between 27% and 29%, driven by a significant decline in nontax deductible items, such as meals and entertainment and certain other expenses. As a result, we expect our adjusted tax rate for fiscal 2021 to be closer to 27%. Turning to the balance sheet and uses of cash. As of the quarter end, we had $6 million of unrestricted cash and equivalents and investment securities, which includes the cash raised in our equity offering in May. As a reminder, a portion of this cash is earmarked to cover accrued but unpaid bonuses for fiscal 2021 and our deferred cash bonuses for fiscal 2020, which will be paid in November. Also in this past quarter, we repurchased approximately 402,000 shares at an average price of $57.72 per share as part of our share repurchase program. And finally, we are pleased to announce the repaying a dividend of $0.33 per share, payable on December 15 to shareholders of record as of December 2. And with that, operator, we can open the line for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And we'll take our first question today from Manan Gosalia with Morgan Stanley. -------------------------------------------------------------------------------- Manan Gosalia, Morgan Stanley, Research Division - Equity Analyst [2] -------------------------------------------------------------------------------- You spoke last quarter about the fact that the number of deals on hold versus the number of deals that were being terminated is sort of more favorable in the cycle than prior downturns. I was wondering with the uptick in revenues this quarter, how much of the activity that's come through is deal closings from pending deals that were already on the cards pre-COVID versus how much of it is new activity that's announced and closed during the quarter? -------------------------------------------------------------------------------- J. Lindsey Alley, Houlihan Lokey, Inc. - MD & CFO [3] -------------------------------------------------------------------------------- So it's -- we don't track necessarily specifically what's sort of pre-COVID versus what is transactions that have been announced and closed within the same year. I'm sure we could go back and find that information. I think you can assume, though, that some of the transactions that are in our revenues in Corporate Finance were transactions that have previously been put on hold. The M&A process is a 9-month process or so. So new transactions that have come up post March 31, some of them have closed, but the majority of them will likely close, assuming all goes well in quarters 3 and 4. So a big chunk of that $108 million is -- are transactions that were in place pre-COVID that's likely put on hold and have kind of reconstituted. -------------------------------------------------------------------------------- Manan Gosalia, Morgan Stanley, Research Division - Equity Analyst [4] -------------------------------------------------------------------------------- Great. And just a clarification on the comp ratio. Should we look at your year-to-date comp ratio and then take that going forward for the rest of the year? Or were you suggesting that full year comp ratio would come closer to 63.5%? And if you can quantify the impact on the comp ratio from the lower reimbursement expenses? -------------------------------------------------------------------------------- J. Lindsey Alley, Houlihan Lokey, Inc. - MD & CFO [5] -------------------------------------------------------------------------------- Yes. So we're estimating reimbursable expenses, and we've been relatively conservative in our estimates. So I prefer not to share that number with you. But with respect to how you should model it, and I mentioned it in my notes, I think our year-to-date kind of 63.1%, 63% is how we're thinking about it for the balance of the year in terms of a target. The 63.5% was merely a catch-up from the first quarter. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Next, we'll hear from Devin Ryan with JMP Securities. -------------------------------------------------------------------------------- Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Equity Research Analyst [7] -------------------------------------------------------------------------------- Just first question here on the -- your commentary on some of the acquisitions that you've been looking at. Obviously, it sounds like potentially timing pushed out a bit or maybe they don't happen. And then I know that when you issued the 3 million shares earlier in the year, some of that cash was pegged towards acquisitions. So I'm just curious if kind of those deals, as we kind of move along here, look like they're not happening, do you increase or you think about increasing buyback or returning some of that through a dividend? Or do you like operating with having that additional buffer of flexibility to the extent something else comes along beyond these specific situations? -------------------------------------------------------------------------------- Scott Lee Beiser, Houlihan Lokey, Inc. - CEO, Senior MD & Director [8] -------------------------------------------------------------------------------- Well, I think when we raised the capital back in May, we always view this as probably a 1- to 2-year time horizon in terms of finding and ultimately closing on transactions and not a 1- to 2-quarter, which is really where we are relative to the time period. We are still in active dialogue with a handful of companies. As we mentioned on the call, some of the conversations we had several months ago have maybe slipped away, and they may come back for the reasons that I stated. So we're maybe a little -- the timing, as you said, has probably been elongated a bit. And ultimately, our view is that we will still find attractive acquisitions. But if we don't, we don't deploy the capital, then we would use it through a buyback or a special dividend. Eventually, we will not hold on to significant amount of excess capital, if that's what happens down the road. -------------------------------------------------------------------------------- Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Equity Research Analyst [9] -------------------------------------------------------------------------------- Okay. I appreciate the color. And then just a follow-up on the capital advisory, I guess, contribution, if you will. Obviously, there's been a lot of activity in the market. And you guys have a little bit of a differentiated business there as well. I'm curious if there's any way to frame out how that business has trended, contribution, and how that's been scaling within the firm and just any parameters you can put around in terms of contribution and then just expectations for the outlook there as well. -------------------------------------------------------------------------------- Scott Lee Beiser, Houlihan Lokey, Inc. - CEO, Senior MD & Director [10] -------------------------------------------------------------------------------- It's still a very important part of our business, housed primarily in our Corporate Finance area. It's still growing. We tend to do much more on the debt capital side than the equity capital side. And in the early days of the pandemic, you might call it some form of rescue type of financing if it's needed, and it seems to be evolving now into financing, still for some companies that have some difficulties. But in many cases, it's now turning into capital to assist in transactions and growth avenues that various companies might have. And we continue to believe very strongly that it will be a growing part of our total business. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Richard Ramsden with Goldman Sachs has our next question. -------------------------------------------------------------------------------- James Edwin Yaro, Goldman Sachs Group, Inc., Research Division - Research Analyst [12] -------------------------------------------------------------------------------- It's James Yaro filling in for Richard Ramsden. So the first one is how are you thinking about the impact of the accelerating COVID cases and mounting number of shutdowns in Europe? And do you expect this to impact either the revenue pipeline? And is this perhaps one of the factors impacting the ability to acquire firms in that part of the world? -------------------------------------------------------------------------------- Scott Lee Beiser, Houlihan Lokey, Inc. - CEO, Senior MD & Director [13] -------------------------------------------------------------------------------- So look, I think none of us have, by any means, the crystal ball on where we're going with all of the pandemic. For a while, it looked like Europe was improving much faster than the U.S., maybe in the last couple of weeks, it's reversed its case. I think a couple of things. One, and generally speaking, financiers, investors, companies, we're all figuring out how to live in this environment. So we clearly have seen, as I think our peers have as well, an improved marketplace. On the other hand, I think there's still volatility to come that could slow down deals, could be another incremental bump to performance in the restructuring group over time. I don't think that there is some magic time period that we know exactly when all this will end. So activity is clearly increasing, but we do expect there will continue to be some bumps in the road. And that's part of our commentary on why we think potentially the timing on closing of deals, even ones that we have reengaged on or brand-new, may take a little longer than what we saw pre-COVID, just because it may not be a smooth sailing between today and the closeout of the pandemic. -------------------------------------------------------------------------------- James Edwin Yaro, Goldman Sachs Group, Inc., Research Division - Research Analyst [14] -------------------------------------------------------------------------------- That makes a lot of sense. And then just more of a clean-up question, which is you obviously had a little bit of an off-cycle increase in your dividend relative to when you have historically increased the dividend in prior years. Is this more just a catch-up from the fact that you didn't increase it 6 months ago and we should think about the timing of future increases to be more at the beginning of your fiscal year? Or is there some other shift in the capital return priorities? -------------------------------------------------------------------------------- Scott Lee Beiser, Houlihan Lokey, Inc. - CEO, Senior MD & Director [15] -------------------------------------------------------------------------------- Yes. I think, historically, you would have found us analyzing and making a change if the Board wanted to make a change in our dividend probably in our May cycle. We happen to do it this time in our July cycle. And I think it was just recognizing the newness of the pandemic in May. It just didn't seem the right time to raise dividends. We clearly felt much better about the economy, our business model, et cetera, come July, and we've continued to feel better about it. So typically, you're right, I would say, in the May time period is normally when we look at it. And this particular year, we decided to just kind of delay that decision for a quarter. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Next, we'll hear from Brennan Hawken with UBS. -------------------------------------------------------------------------------- Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [17] -------------------------------------------------------------------------------- Quick one on -- following up on that question on Europe, actually, but narrowly focusing it a bit to the restructuring side of things. We saw this sort of a head fake where it looked like Europe had things more under control. And then with the resurging virus there and now lockdowns, interested whether or not you saw any shift in the velocity of restructuring activity or mandates, whether you saw that step back in the region result in any increased activity and whether or not that would lead you to expect a similar thing to happen if we should experience such things in other parts of the world? -------------------------------------------------------------------------------- Scott Lee Beiser, Houlihan Lokey, Inc. - CEO, Senior MD & Director [18] -------------------------------------------------------------------------------- I think the -- you really wanted to map out a monthly or weekly new engagements time line, which none of us will get it in that fine-tune of a period. But if we did, I don't think much of that difference in statistics has to do with whether Europe was opening up, closing down or what might happen in the rest of world. I think what we found is there's still a certain percentage of businesses across the globe whose business models that once worked will not work or going to need to be meaningfully modified going forward. Some of these companies have been able to be helped out because they were able to raise some debt money, lesser extent equity money. And effectively putting on additional debt in a company whose business model still needs to be altered is not a long-term solution. It may be a short-term solution. So I think we're going to see some waves of incremental restructuring business down the pipe as well. But I don't like -- I said I don't think particular changes week-by-week or month-by-month have been influenced per se by what's happening in shutdowns. I think that probably has more impact short term on our Corporate Finance business and less impact on the Restructuring business. -------------------------------------------------------------------------------- Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [19] -------------------------------------------------------------------------------- Okay. And then when you think about the composition of restructuring revenue, can you give us a rough idea of what -- how it breaks down as far as retainers versus success fees and such? Is there a way you could give a rough indication of that composition? -------------------------------------------------------------------------------- J. Lindsey Alley, Houlihan Lokey, Inc. - MD & CFO [20] -------------------------------------------------------------------------------- Yes. Brennan, it's a good question. We don't disclose that. I mean I think we have disclosed before kind of what our breakdown of debtor versus creditor is, but we haven't gotten into the specifics regarding retainer fees and probably prefer to keep it like that. -------------------------------------------------------------------------------- Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [21] -------------------------------------------------------------------------------- Okay. Let me try and get at it a different way then, Lindsey, take a mulligan on that one. How about -- I know there's a lot of volatility in the restructuring line. When we think about it from a modeling perspective, should this past quarter's results be a reasonable jumping-off point for when we think about it from here? Or is there still too much quarter-to-quarter volatility for that? Or is there a reason to believe that the restructuring this quarter was particularly robust and maybe might not necessarily be repeated in the near term? -------------------------------------------------------------------------------- J. Lindsey Alley, Houlihan Lokey, Inc. - MD & CFO [22] -------------------------------------------------------------------------------- Yes. I would say that -- I would normally say that it's -- there's too much volatility to use this quarter as a proxy of what Q3 or Q4 might look like. Having said that, we did take on a number of cases in Q1, and those cases have started to close and will continue to close into Q3 and Q4. So we do expect continued elevated quarters in Q3 and Q4, but that volatility of a $10 million, $15 million, $20 million engagement is still there. So you're not going to see anywhere near the same growth profile in restructuring that you're going to seek in corporate finance coming out of a shock to the system like you saw in Q1, so -- but caution you to look at it as, hey, I got growth in restructuring coming up in Q3 and Q4, I don't think it's going to look like that but you are going to see elevated over previous years. -------------------------------------------------------------------------------- Scott Lee Beiser, Houlihan Lokey, Inc. - CEO, Senior MD & Director [23] -------------------------------------------------------------------------------- And Brennan, I might add, pre pandemic, we probably range quarter-by-quarter in restructuring between $50 million and $100 million, and that's just kind of the normal quarterly troughs, valleys you have. I think you still have that kind of dynamic, post pandemic. It's just we're at higher troughs and higher peaks than we saw before. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- We'll now hear from Ken Worthington with JPMorgan. -------------------------------------------------------------------------------- Kenneth Brooks Worthington, JPMorgan Chase & Co, Research Division - MD [25] -------------------------------------------------------------------------------- No good conference call can exist without a political question. So with politics coming into play here, in terms of Corporate Finance, do higher capital gains and dividend taxes for the wealthy threaten or enhance the middle market M&A business? And maybe how might a big round of stimulus impact either the timing or the magnitude of restructuring business, maybe not at all? And then any thoughts, if there's a change in the political environment, how that might flow through in any way through the valuation business? -------------------------------------------------------------------------------- Scott Lee Beiser, Houlihan Lokey, Inc. - CEO, Senior MD & Director [26] -------------------------------------------------------------------------------- Well, absolutely no difficulty in answering those questions. Maybe taking it in reverse order. I think on the valuation side, depending on the outcome of the elections, we could see a decent amount of increase in the -- in our third fiscal quarter in terms of certain kind of state and tax planning work, if people think actually tax rates will change in 2021 and beyond because you can actually start that work in the next week or 2. Long term, if there are changes in tax rates, usually that is good for valuation just because when there's changes, people will have different strategy. So I think they're either neutral or positive in terms of changes in the tax code and the outcome of the elections. On the Corporate Finance side, we have talked for several quarters that there would be some amount of companies who might want to accelerate and purposely try to close a transaction by December 31. At this juncture, it's impractical for anybody to hire us with 2 months to go and say, get it closed by December 31. Maybe even in the last quarter, it was pretty hard to do that. We have some amount of transactions we think have been motivated by potential changes in the tax code, elections, et cetera, actually probably not as many as we thought there would be. So I'm not sure there's going to be as much of a change there. I think actually the pandemic, ability for people to figure out how to work remotely, which business plans are working or not working, has much more positive or negative influence on our Corporate Finance business at this juncture than what happens in the elections and tax rates. And in terms of the stimulus, I think the stimulus would clearly help M&A activity. I'm not sure, once again, the stimulus will meaningfully help companies not go into restructuring that otherwise need to go into restructuring. This still comes down to if you have a business plan that no longer works in today's economy, you can funnel a lot of money out there, and it may delay things, but it's not going to completely get somebody out of the woods. So we think about it all the time. We're talking to our clients and prospects about it all the time. None of us are smart enough to know what's going to happen, or even if we knew the outcome, what will happen post that outcome. And so we do the best we can in planning. And I guess those would be some of my thoughts in terms of your politically charged questions on multiple product lines. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- Our final question will come from Steven Chubak with Wolfe Research. -------------------------------------------------------------------------------- Brandon Tyler Reagan, Wolfe Research, LLC - Research Analyst [28] -------------------------------------------------------------------------------- It's Brandon, calling in for Steven, Reagan. So I guess the first question is pertaining to like the difference in recovery between Europe and U.S. European deal activity seems to be largely driven by middle market, where U.S. has been driven more so by large deal activity. I guess how have your conversations been different in the different locales? And what do you think really -- what would you think it would take to get the U.S. market really cooking in the middle market? -------------------------------------------------------------------------------- J. Lindsey Alley, Houlihan Lokey, Inc. - MD & CFO [29] -------------------------------------------------------------------------------- I think -- let's start with the U.S. I think the U.S. middle market M&A business is really cooking. It's -- as Scott mentioned in his comments, we are seeing as much activity as we've ever seen. Now that activity is new engagements, and new engagement takes months to complete. And so you won't see the revenues in this activity for a couple of quarters at least. But it is a very, very good M&A market right now and especially in the middle market. And that's really driven not just by private equity coming back into the picture, but also corporate and strategic. So you're seeing some pretty well-known names transact at much higher levels in the large-cap space. But there is a lot of activity going on in the middle market, and we're benefiting it -- from it as we should. I think with respect to Europe, it's not a dissimilar comment. We are seeing pretty good activity in Europe. It's unclear to us as of now how the recent shutdowns and the recent spikes are going to affect that. It may, and it may significantly. But prior to really the last couple of weeks, the U.S. and the European markets were both quite active really since the beginning of June -- sorry, beginning of September. -------------------------------------------------------------------------------- Brandon Tyler Reagan, Wolfe Research, LLC - Research Analyst [30] -------------------------------------------------------------------------------- Great. And I guess one follow-up on the privates. How much of it do you feel like is pull forward in the case of increase in the capital gains tax? And how much of it do you feel is actually sustainable? -------------------------------------------------------------------------------- Scott Lee Beiser, Houlihan Lokey, Inc. - CEO, Senior MD & Director [31] -------------------------------------------------------------------------------- I think we missed maybe the first half of your question. Can you just repeat it? -------------------------------------------------------------------------------- Brandon Tyler Reagan, Wolfe Research, LLC - Research Analyst [32] -------------------------------------------------------------------------------- Sorry. In terms of private that you just mentioned, obviously, there's a lot of discussion around raising the capital gains tax. So I guess how much of that activity do you feel like is pull forward? And how much do you feel like is sustainable? -------------------------------------------------------------------------------- Scott Lee Beiser, Houlihan Lokey, Inc. - CEO, Senior MD & Director [33] -------------------------------------------------------------------------------- Because I think -- I said earlier, I think the whole motivation to get a deal done sooner versus later in kind of your pull-forward question, been relatively minor to the overall scheme of our firm, just not been a giant rush. I wouldn't describe it as a material part of things that we're working on today or things that have closed. -------------------------------------------------------------------------------- J. Lindsey Alley, Houlihan Lokey, Inc. - MD & CFO [34] -------------------------------------------------------------------------------- Yes. We might see some incremental revenues in Q3. But it's -- to Scott's point, it's -- I mean the rest of it is very sustainable. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- That will conclude today's question-and-answer session. I will now turn the conference over to Scott Beiser for any additional, closing remarks. -------------------------------------------------------------------------------- Scott Lee Beiser, Houlihan Lokey, Inc. - CEO, Senior MD & Director [36] -------------------------------------------------------------------------------- I'd like to thank you all for participating in our second quarter fiscal 2021 earnings call, and we look forward to updating everybody on our progress when we discuss our third quarter results for fiscal 2021 this coming winter. Bye-bye. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- That will conclude today's conference. Thank you for your participation. You may now disconnect.