Greenhill & Co., Inc.
Q1 2015 Earnings Call Transcript

Published: 24 Apr 2015

[Operator:]

Good afternoon and welcome to the Greenhill & Co. first quarter 2015 earnings conference call and webcast. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Chris Grubb, Chief Financial Officer. Please go ahead.

[Chris Grubb:]

Thank you. Good afternoon and thank you all for joining us today for Greenhill's fist quarter 2015 financial results conference call. I am Chris Grubb, Greenhill's Chief Financial Officer and joining me on the call today is Scott Bok, our Chief Executive Officer. Today's call may include forward-looking statements. These statements are based on our current expectations regarding future events that, by their nature, are outside the firm's control and are subject to known and unknown risks, uncertainties and assumptions. The firm's actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the firm's future results, please see our 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. Neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date on which they are made. I would now like to turn the call over to Scott Bok.

[Scott Bok:]

Thank you, Chris. The first quarter was a busy and highly productive one for our firm in many fronts. We achieved significantly higher revenue and profitability compared to last year. We were involved in a substantially increased number of announced transactions that generally are still pending and we announced the addition of 12 new managing directors who together enhance our capabilities across multiple regions, industry sectors and types of advice. Turning first to the quarterly financial results. We achieved advisory revenue of $61.9 million, a 28% increase over the first quarter of 2014. I should add here the Cogent, our acquisition which was consummated on April 1, separately had $10.4 million of unaudited first quarter revenue which is consistent with its strong revenue pace last year and reinforces our enthusiasm for that business. Starting in the second quarter, Cogent's revenue will obviously be incorporated into ours. Turning back to our first quarter revenue, it's fair to say that neither this quarter nor the year ago first quarter was a particularly strong one in terms of large completed transaction revenue. But the first quarter of 2015 saw a significant improvement in terms of announcement and opinion fees relative to the first quarter of 2014. Our improved revenue outcome resulted in cost ratios far below last year's first quarter levels with our compensation ratio at 54%, the same as last year's full year result and our non-compensation cost in absolute dollars very similar to last year's full year run rate but for someone time transaction costs related to the Cogent acquisition. Even after those transaction costs, which had a negative impact of about two points of margin and $0.03 of earnings per share, we achieved a 20% pretax profit margin and EPS of $0.25. That allowed us to again pay a strong quarterly dividend and repurchase sufficient shares to achieve a flat share count and we accomplished that well again ending the quarter with essentially no net debt. Turning now to transaction announcement activity. We were involved in 21 transactions globally in the quarter, all of which are listed on our website. As I am sure, most of our shareholders will know, we typically list on our website on a fairly prompt basis nearly every corporate transaction with which we are involved. Fund placement transactions generally are not listed due to regulatory limitations on publicizing those prior to the final closing of a fund and bankruptcy or restructuring advisory transactions are often listed very late given the long time tables for such transactions. But certainly large majority of M&A advisory roles as well as most financing advisory roles are listed with the exceptions relating primarily to particular client confidentiality requirements. Putting the first quarter 21 announced transactions in context, we only listed nine transactions in the prior quarter and 12 transactions in the year ago first quarter. So clearly as we suggested would be the case in our last quarterly call, we are off to a stronger start to 2015 both in revenue terms and in terms of announced transaction activity. We continue to see an unusually large share of our revenue, by historical standards, coming from U.S. client and market statistics suggest that indeed is the region seeing the strongest level of activity, but it is worth noting the highly diverse regional participation we saw in first quarter announcements. Eight of the 21 announced transactions involved an Australian company, seven involved an European company, three involved a Japanese company and nine involved a North American company, with one-third involving cross-border advisory work and hence the double counting in those regional statistics. The regional teams we have developed are working collaboratively on meaningful cross-border opportunities taking advantage of our unified global team of partners with no reliance on contractual alliances, joint ventures or similar arrangements as well as our collegial culture to deliver seamless and strong global advisory capabilities to our clients. Our European related announcements related predominantly to the U.K. market. We still have a lot of upside potential in Continental Europe as activity picks up there. As with the U.K., in both Australia and Japan, we are hopeful that increased announcement activity will lead to increased revenue contribution as we progress through the year. Finally, in Brazil we have built an attractive list of client mandates but getting deals to agreement and announcement is very difficult given the current economic market and political challenges that country is facing. In sum, we are busy everywhere. Most of our current revenue is coming from the U.S. Deal announcements suggest that U.K., Australia and Japan will become more significant revenue contributors and longer-term we remain hopeful for increased activity in revenue in Continental Europe and Brazil. It is also worth noting that we have been working on meaningful transactions from a size perspective. While we don't focus on league tables, I can't help but note our strong year-to-date ranking in that popular metric. Our strategy is to focus primarily on larger transactions not because of league tables but because we believe they drive higher productivity, higher profitability and greater brand value than smaller transactions. In the first quarter, we advised on nine transactions of over $1 billion including financing and advisory roles. And five of those nine were M&A transactions of over $3 billion. These larger transactions related to both the U.S. and Europe and were originated and executed by a diverse group of managing directors. By sector, the industrial sector was by far the most active sector for us in the first quarter, followed by the healthcare sector which continues to be a particularly active one both for us and for the market generally. But we are also seeing good client activity in most other sectors as well. By type of advice, we continue to generate the majority of our advisory revenue from M&A transactions. Within M&A, completion fees as always were the biggest driver but revenue from announcement and opinion fees was up meaningfully compared to a year ago. Our financing and restructuring advisory business continues to find attractive financing advisory opportunities, but the very favorable credit environment continues to constrain more traditional bankruptcy and restructuring activity. Our capital advisory business is off to a strong start again this year with a very active real estate fundraising environment. The acquisition of Cogent should drive meaningful growth in this segment of our business which I will speak to in greater detail shortly. Before I go into more detail on Cogent, let me comment briefly on the market environment for M&A activity. The market statistics for the first quarter are similar in many ways to those as 2014, although even further skewed toward larger transactions versus a broader increase in the number of total transactions. Specifically the number of announced transactions was flat versus a year ago, while the volume of transaction announcements is up about 16% compared to the prior year driven by meaningful percentage increases in transactions over $5 billion and over $10 billion in size. But understand what this means, it is important look at absolute as well as percentage changes. The overall volume statistics were driven by deals $5 billion or greater in size but to put that in context, there were only 14 more of those in this year's first quarter than last year's. Specifically there were 31 deals of that magnitude in the first quarter versus 17 in last year's first quarter. So it continues to be a small number of deals that are driving improvement in deal volume statistics. As it relates to the transaction completions, the trends are very similar, with total transaction completions volume increasing 20% year-over-year driven by a small number of large transaction completions, while the total number of transaction completions declined slightly further to start the year. What does all this market data mean? Of course its early in the year for any grand pronouncements or predictions, but we continue to feel like the M&A market is continuing to improve, both in the US and globally, although the improvement so far is focused on a small incremental number of very large transactions. Of course, what's pleasing for us is that we had an advisory role in three of the 31 $5 billion or greater deals announced globally in the first quarter. So we feel good about not only some improvement in market activity but also the share of that activity we are involved with. Now if you will bear with me, I want to go into a bit more detail around Cogent, the acquisition we close on April 1. Even as we enjoyed some improvement in general M&A activity and an increased level of announced deal activity at Greenhill, we are also focused on increasing the breadth and depth of the firm's advisory capabilities and the resulting revenue opportunities which is what led us to Cogent. Our shareholders have universally reacted very favorably to this acquisition transaction, so I thought I a review of seven questions would be worthwhile. First, what is its business? Cogent is a leading financial advisor to pension funds, endowments and other institutional investors on the secondary market for alternative assets. Specifically, we believe they are, by a significant margin, the largest advisor on sales of private equity interest from one institutional investor to another. Its business is much more granular or less lumpy than ours with many small transactions that has the scale and efficiency to do it profitably. Certainly, it should add significantly to the diversity of our revenue and earnings. Second, why were we attracted to Cogent? There are many reasons. It is a pure advisory business like Greenhill. It is a global business with a blue chip client base like Greenhill. It is seen as a market leader in its area of focus like Greenhill. But we believe it is less cyclical than Greenhill's M&A business. It focuses on what we believe the business in the early stages of growth. Remember, not long ago it was rare for an institution to seek early liquidity for private equity investment other than a distressed situation. Today, it is becoming increasingly common. On top of all of this economic attractions of the combination, we believed after getting to know them that the Cogent team with an excellent cultural fit for Greenhill. Third, what exactly did we get in the deal? We get the entire business, the full teams spread across five offices, the global network of relationships and the data on hundreds of past transactions, not to mention the well-earned reputation of the leader in this field. I know some questions were raised regarding whether we got the full team. So let me say categorically that we did. The only Cogent managing directors not referenced in our acquisition press release, were a senior administrative person who in fact also joined us and a shareholder of the business, who had not been involved in client advisory work for many years. Fourth, how did we structure the transaction and what was our thinking behind that? There are a number relevant features to the transaction's structure. A significant part of the purchase price is subject to an earnout based on revenue. We set that earnout at a level that requires performance consistent with Cogent's strong results last year even though the team has strong incentives in the form of Greenhill common stock ownership and compensation going forward to grow the revenue base far beyond that level. In the first quarter, as I said, Cogent's last as an independent company, it achieved more than $10 million of revenue unaudited, consistent with last year's strong performance and the momentum at winning new assignments continues to look good. The fact is, we expect and even want Cogent to achieve the earnout. And if it does, we will have acquired the business at what we believe is a very attractive valuation. In terms of form of consideration, we wanted to minimize the use of our stock at recent valuation. So we focused the use of stock on employee shareholders who would be continuing with us, where there is an alignment benefit. For outside Cogent shareholders who are not involved in the business, we thought it was better to use cash, particularly given the low cost of debt these days. Fifth, how should you think about the valuation metrics of this business? In simple terms, assuming the full earnout is achieved, we acquired Cogent for about half of our revenue multiple. Given that it has had a cost structure even more attractive than ours recently, that implies an even more attractive earnings multiple discount. And on top of that, as our press release today notes, we will benefit from cash tax savings as a result of the deal being structured as an asset acquisition for tax purposes which allows us to amortize the deductible goodwill much of the purchase price over 15 years. In sum, you can see why we believe this transaction should be highly accretive for us. Sixth, so why would Cogent sell its business at that valuation, as some have asked? There are many reasons beyond the fact that we believe the valuation was fair for a relatively small private partnership focused on one line of business. The main one is probably that the team cared about its future home. And they thought Greenhill provided the best fit. I think they also liked the potential upside in our stock and in fact they are up 16% already from the announcement date when the number of shares was fixed. And lastly, I think they liked our strong dividend as well as dividend equivalents paid on restricted stock. Seventh and last, is it realistic that we could realize synergies that could make the transaction valuation even more attractive? We certainly didn't structure or price the deal such that synergies were necessary for it to make sense, but we do think there many areas of synergies. On the cost side, there are modest savings from things like combining offices which we have already begun to do. On the revenue side, the most important area of overlap is for our real estate focused capital advisory team to help find and win secondary transaction opportunities in the real estate sector. But that is not the only area of possible synergies. For example, we are already taking advantage of opportunities like having Cogent bankers work with our financial services M&A bankers to seek business from financial institutions they cover. Plus there are regional opportunities for growth like leveraging our strong franchise in Australia. Let me close by just briefly noting that we are also excited about four individual M&A focused MD hires that we made in the first quarter in Houston, San Francisco, Sydney and Tokyo. We believe each of these individuals has the potential to make a significant positive impact on our business. In addition, it's worth noting that we supplemented our teams and various offices with some important lateral mid-level professional hires from a variety of big banks as well as boutique firms. Now I will turn it over to Chris.

[Chris Grubb:]

Thank you, Scott. Our total revenue for the first quarter was affectively equal to our advisory revenue for the quarter with the total revenue compares in the last year benefiting from no meaningful activity with our small remaining principal investment portfolio relative to a write-down in the first quarter of last year. Going forward, we expect this lack of any meaningful difference between our total revenue and advisory revenue to continue given our very small remaining portfolio of principal investments. I will now go into a bit more detail on compensation costs, non-compensation costs, dividends and share repurchases and some additional detail on the financial impact of the Cogent acquisition. Starting with compensation costs. We achieved a compensation ratio of 54% for the first quarter of 2015, consistent with our full year compensation ratio over the last two years. As we have commented previously, we have consistently achieved our goal of a GAAP compensation ratio that is the lowest among our close peers and we expect we are on track to achieve that goal again in 2015. Moving to our non-compensation costs. Our first quarter non-comp cost were $16.3 million inclusive of transaction related expenses incurred during the quarter, including an increase in professional fees of approximately $1.2 million. Excluding these transaction related expenses, our non-comp cost were consistent with our absolute dollar run rate over the last several quarters and remain well under control. Looking at our dividends and share repurchases. Our dividend this quarter was again $0.45 per share consistent with the quarterly distribution made over the last several years. During the first quarter we repurchased approximately 307,000 share equivalents at an average cost of $34.40 per share for a total cost of $10.6 million. As a result of our ongoing share repurchase activities, we ended the quarter with a flat share count to a year ago and we continue to maintain a share count that is effectively flat with our 2004 IPO despite significant annual stock-based compensation and our 2010 acquisition in Australia, which compares very favorably to both our large and small competitors. We ended the quarter with cash of $34.4 million and an almost equal amount of debt at $34.7 million. Our Board of Directors has authorized a repurchase of up to $75 million of our common stock through the end of 2015, of which approximately $65 million remains available. The level and timing of stock repurchase activity going forward will be driven by the timing of excess cash generated in our advisory business over the course of the year and our timing of paying down the transaction related debt associated with the Cogent acquisition. Finally some additional details on the Cogent acquisition and certain non-revenue impacts on our financials. We financed the initial portion of the purchase price with approximately 780,000 shares of our common stock and a new $45 million term loan consisting of two tranches of $22.5 million each. The shares will impact our diluted share count starting on April 1, 2015 and will be included in our shares outstanding and fully diluted share count going forward. The goal with respect to share count is to do exactly what we did following our Australian acquisition five years ago, that is to repurchase shares to offset all the shares we issued so that in the future we can again say what we can today which is we have fewer shares outstanding than we did the day after our 2004 IPO. The $45 million of debt borrowed will be reflected on our balance sheet as of April 1, 2015. The first $22.5 million tranche of the term loan matures on April 30, 2016 and we expect to pay that down of the course of the next 12 months from cash flow generated by the business. The second $22.5 million tranche of the term loan matures on April 30, 2018 and we also expect to repay that from cash flow over time. There are no prepayment penalties on the term loans and we will evaluate share repurchases versus prepayments on the term loans on an ongoing basis with the goal of returning to a no net debt position while continuing to be opportunistic as it relates to returning capital to shareholders. Both tranches of debt have an attractive interest rate with 4% for the one-year tranche and 4.5% for the three-year tranche, subject to reduction following achievement of certain paydown thresholds. We also increased the size of our revolving credit facility to $50 million from $45 million reflecting the increased size of our business and giving us greater flexibility to manage cash across our geographies. From a cost structure perspective, we do not anticipate the addition of the Cogent team to have a material impact on our compensation ratio, although it will increase our fixed compensation costs on an annual basis going forward, just as all new hires do. From non-comp perspective including anticipated amortization of finite life intangibles there is a non-cash item, we expect the acquisition to move our absolute dollars of annual non-comp costs from the low $60 millions per year to the high $60 millions per year. Our ratio of non-compensation cost to revenue should remain fairly flat or even decline relative to the additional revenue we expect the Cogent business to generate. Finally, while our reported tax rate will not be impacted, the transaction is structured to allow for the amortization of much of the purchase price over a 15 year period from which we expect to receive a cash tax benefit, in effect lowering our net purchase price over time and benefiting our annual cash flow. Now let me turn it back to Scott.

[Scott Bok:]

To recap our start to 2015, we had a solid increase in revenue, we had 21 transaction announcements, far more than last year including a fair number of big ones spread across industry sectors, types of advice and geographies. Behind the scenes, we had many important wins from both new and long-standing clients. We acquired a very attractive complementary business in Cogent Partners adding eight managing directors and a team of about 40 professionals at a very attractive valuation. And we hired four additional managing directors in several talents at mid-level professionals to enhance and support our teams globally. In sum, Greenhill's off to a strong start to the year and we are as confident as ever in the strength of the franchise moving forward. With that, we are happy to take questions.

[Operator:]

[Operator Instructions]. Our first question will come from Douglas Sipkin of Susquehanna.

[Douglas Sipkin:]

Good afternoon, guys. How are you?

[Scott Bok:]

Good. How are you, Doug?

[Douglas Sipkin:]

Doing all right. So I appreciate the color on Cogent. Maybe just drilling a little deeper, Scott, in terms of both markets, M&A and then Cogent, specific to M&A, obviously a good start to the beginning of the year. It looks like maybe even better after that in April towards the end. So I am just curious to get your pulse, how are you feeling about the remainder of the year over the next couple of months? I know you came into the year, I would say cautiously optimistic. It seems like you guys are validating that, but I am just curious to see if there is any update on that? And then with respect to Cogent, obviously very encouraged to see a good start there, little over $10 million which is pretty consistent with the run rate there. So the outlook for secondary transactions throughout the year obviously on the other side of the equation, the alternative business for your clients effectively remains very strong. So I am curious what you are seeing there.

[Scott Bok:]

Sure. I mean, look obviously we try to stay away from too much forecasting. About the M&A market, we kind of feel like we did a few months ago. Cautiously optimistic is probably a good phrase to use. People are busy. Obviously, we have had a good run in terms of announcements and we are hopeful it continues. There have obviously been some stops and starts over the last several years in terms of the M&A cycle, but certainly our hope is that this time it's for real in terms of the upturn. On the Cogent side, it's just a very active market right now. I think the secondary market again, it began as kind of a distressed market. People essentially waited for the private equity fund to mail you back your realizations at some point in life, if you are really in distress. Today we are almost at an opposite kind of a market, where pricing is actually very firm. There is a lot of capital in dedicated secondary funds that's out there and I think a lot of owners of private equity interest who wouldn't normally be sellers are now looking at it and saying maybe at these prices I do want to lighten up my position or maybe I want to reallocate less tax, more Europe, less real estate, more of something else. So it seems to be, again, it's early days for us, but it seems to be a very active business in terms of new bakeoffs and client wins on the Cogent side.

[Douglas Sipkin:]

Great. That's very helpful. And then, just a clarification question from Chris on sort of the tax benefits from the way this transaction was structured. Is it reasonable to think about that, I guess on a straight line basis, just thinking about the purchase price divided by 15 years and that's effectively a tax affected, that's going to be your tax savings per annum?

[Chris Grubb:]

That will get you close. We are finalizing the purchase price accounting and some of that will be allocated to finite life intangibles that will amortize more quickly and you will see those through the P&L. We obviously did buy some assets that will come over and depreciate on their own schedule. But I think to take a discount to the purchase price, apply a straight line and that will get you fairly close.

[Douglas Sipkin:]

Great. And then with respect to hiring and recruiting, it looks like you guys are off to a pretty good start. You are actually probably a little fast, you are not even including the Cogent side than you have in some time. Maybe a little perspective there what you are seeing in terms of the environment for recruiting? I mean it feels like the business has been pretty strong for the industry, yet it also still feels like there is quite a lot of movement to the boutiques or the independents, so to speak. So I am curious how your outlook looks there.

[Scott Bok:]

I think it's still pretty favorable outlook, I would say. You never know when these things are done. On our last quarterly call, I couldn't tell you about much of any of these things. And I thought we were on the brink of Cogent. I thought we were on the brink of three more MD hires. And in fact they did come through in just really the days and couple of weeks after that call. You never know until you finally get something. It's like an M&A deal. You don't know until -- it's not done until it's done. But it still feels like there a lot of people interested in moving. It certainly feel like there continue to be people interested in leaving now the big bank kind of environment to go to a place like ours that is really much smaller or less bureaucratic, less political and more focused on what those individuals do. So hopefully you will see more as time goes on, but even if you don't, obviously it's been a big year for us already.

[Douglas Sipkin:]

Yes. Okay. Great. Yes, that's all I got. Thank you for taking the questions, guys.

[Scott Bok:]

Thank you, Doug.

[Chris Grubb:]

Thank you.

[Operator:]

And the next question will come from Devin Ryan of JMP Securities.

[Devin Ryan:]

Great. Thanks. Hi, guys.

[Scott Bok:]

Hi. How are you, Devin.

[Devin Ryan:]

Going well. So I guess, just staying on Cogent, now with the deal closed. If we were to apply 2014 revenues as our starting point, the deal would seem to be accretive out of the gate and could be nicely accretive. As I worked through some of those considerations that that you guys talked about in the prepared remarks and some the puts and takes, am I missing anything there? And then with respect to revenue recognition, how lumpy does it tend to be from quarter-to-quarter for that business?

[Scott Bok:]

Well, I have only owned if for a couple weeks. So I probably can't give you too much perspective on the quarters. But now let me say this, I think as I said, the math is pretty simple. If we bought something for roughly half our revenue, if their cost structure is the same as or even a little better than ours, even before you think about anything like synergies, included that math tells you that unless something dramatic change is going forward, it's an accretive deal and maybe potentially a significantly accretive deal. In terms of how the revenue comes, as I noted, it's much more granular than ours. They have that size and efficiency, I think, unlike any of their real competitors. So they can do actually quite small things very quickly and efficiently and profitably, even though the fee may not be large. So they do, like our space, from fees that actually are quite large, but they lots of that are very small as well. My guess is, that over time that means it's less lumpy than ours, simply because the fees tend to come in smaller chunks and there is just a lot of small ones that get mixed in there. So I would probably think of it as being a little smoother ride than certainly the M&A business, where you can have one gigantic fee can be a very big part of our quarter's revenue.

[Devin Ryan:]

Sure. Okay, good. That's helpful. I just wanted to clarify on that. And then secondly just on Europe maybe more broadly, we are starting to see pickup in cross-border activity going into Europe. So what are you guys seeing, I think, in Europe? And then, with respect to cross-border? And how do you feel like you are positioned to the extent cross-border really is a pretty strong theme here over the next year or so?

[Scott Bok:]

Look, I think we have always had great European business. I mean we have been in London almost as long as we have existed as a firm. We have been in Frankfurt for something like 15 years now. So we have a long presence there and a long track record, I think, particularly in the U.K. market which is by far the most active one always in Europe. I think we are very, very well-positioned. We are certainly think some more activity, as I said it's still pretty more heavily weighted than we probably like to the U.S., but we had some big successes including cross-border into Europe during the quarter. And I continue to think European M&A is going to return to its historic position of being something that's not that different from American M&A. It just hasn't been there in quite a number of years for obvious economic reasons.

[Devin Ryan:]

Okay. Great. I will leave it there. Thanks a lot.

[Scott Bok:]

All right. Thank you.

[Operator:]

And the next question comes from Joel Jeffrey of KBW.

[Joel Jeffrey:]

Hi. Good afternoon, guys.

[Scott Bok:]

Hi, Joel.

[Joel Jeffrey:]

Believe it or not, you guys have answered most of my questions on Cogent in your prepared remarks. I guess the one thing that I am just curious about here is, you talked a lot about the upside, I am just wondering in this business what's the risk to it? Where is the potential downside? In what kind of markets would those occur?

[Scott Bok:]

Well, first of all, thanks for making me feel good about reading an entire page of detail on Cogent. I was hoping that would be somewhat useful. With any acquisition, I mean we are in the M&A business, right, with any acquisition obviously there is a risk in terms of just integrating the team and sort of letting them do what they do without bothering them but also trying to get whatever synergies you can. So there are those general risk in any deal. But I think the nature of their business, I think, is fairly low risk. Again we kind of waited before we went ahead and did this transaction and watched this factor, this industry for a number of years and part of it was because we weren't sure if it wasn't just a distressed business, one where there is a lot of desperate sellers dumping their stuff in the market in years like 2009. And we wanted to see how it evolved and behaved in a much more normal market. Certainly, again what you are seeing right now, a lot of activity, a lot of new assignments and in many cases now, it's sellers, new sellers coming into the market and thinking, hey, if I can get a price somewhere around NAV, net asset value, according the PE funds marks, then I am interested in exploring that. So I think certainly you could have a positive here and there, if you had a big downdraft in valuations or something like that, but frankly a big downdraft probably causes a big flurry of activities as buyers get anxious to put money to work at discounts and sellers maybe somewhat in need of liquidity. And I think we are seeing right the flipside of that, which is the robust market with higher valuations. So we think it's a business that's durable and again in the very early days of its history. If you go back 10 years ago, it was very simple. If you invested in a KKR or Blackstone fund, for the next five years you put money in and for the five years after, you got money back. And it's only really a fairly recent phenomenon that institutions are regularly reallocating their private equity portfolio by using the secondary market.

[Joel Jeffrey:]

And then I mean in terms of the barriers to entry to this business, is this very much like the M&A business where it is very relationship driven?

[Scott Bok:]

To some extent, but I will tell you, the barrier of entries they have that's I think quite a bit bigger than in the M&A business where somebody could start a boutique if they knew 10 clients or if they knew one industry very well or one region of the world very well. They really have number one, a global network with hundreds, maybe even probably thousands, really that the right kind of figure of investors in private equity fund all over the world. It's not that easy to build that network everywhere from the Middle East to Asia to all over the U.S. and Europe. Secondly, they just have so much experience. I have seen personally bake off they have been and where I have attended where the prospective clients says, I am interested in exploring a sale of these huge number of funds and the Cogent team is able to say, well we have actually transacted in most of those funds. We know who bought them. We know what price they bought them. We know who is interested in more. And I can't say that about every fund but they can say that about a huge number of funds, just given the volume of business they do. So Cogent is just like any business. If you are the number one and you have the highest volume, that volume becomes your biggest selling point with each new bake off you get into.

[Joel Jeffrey:]

Okay. And then just lastly for me, I think you said that the cost of the transaction was about $0.03 in the quarter on the expense side. Where and what expense line items does that fall into?

[Scott Bok:]

Mostly legal type expenses and things, legal and accounting and things like that.

[Joel Jeffrey:]

Okay. Great. Well, thanks for taking my questions.

[Scott Bok:]

Okay. Thank you.

[Operator:]

And our next question comes from Jeff Harte of Sandler O'Neill.

[Jeff Harte:]

Good afternoon, guys.

[Scott Bok:]

Hi, Jeff.

[Jeff Harte:]

A couple from me. One, from a cash flow perspective, the need to pay back $22.5 -million of the debt over the next year, how does that impact, I know it's not going to impact the dividend, but how does it potentially impact the buyback? It would seem that you are going to have to dialback for the buyback versus previous years to hit that.

[Scott Bok:]

I think, in the very early days as we go through the next 12-plus months until that first bit is due, obviously we will focus on paying down some of the debt. But as Chris said, we do have the ability to toggle back and forth between repaying debt faster or buying back stock. And we are going to do that opportunistically based on what our cash flow is, what our outlook is, for the deal flow that we are seeing for both ourselves and Cogent. And certainly we don't expect it's going to be much of a challenge given not only our cash flow but all the incremental cash flow that comes from Cogent.

[Jeff Harte:]

Okay. And as you sit here now, what's the current or I guess post-Cogent, what's the VSMD count going to be? And I am just thinking it was 68, then we add eight and then three more hires? Or is that --

[Scott Bok:]

It's like 78, I think is the right number to use.

[Jeff Harte:]

Okay. That's it for me. Thanks.

[Scott Bok:]

All right. Thanks a lot, Jeff.

[Operator:]

And the next question is from Brennan Hawken of UBS.

[Brennan Hawken:]

Hi. Good afternoon.

[Scott Bok:]

Hi, Brennan.

[Chris Grubb:]

Hi, Brennan.

[Brennan Hawken:]

So just to finish off some of the Cogent questions or at least for me, you guys borrowed the $45 million. Do we just add that to the debt that you had on the balance sheet as of year-end and get you to the ballpark of about $80 million? Is that how we should think about the 1Q balance sheet?

[Scott Bok:]

Yes. Because obviously the debt arrived for the day after the quarter ended. Yes.

[Brennan Hawken:]

Right, perfect. Okay. And then should we think about any more transaction costs in 2Q coming? I know you had a little bit, just from a tiggy tack [ph] modeling type question here.

[Scott Bok:]

Anything would be absolutely trivial. So no, I wouldn't think about anything.

[Brennan Hawken:]

Okay. Terrific. And then, one more question here on sort of the M&A business. I know you have made reference a few times to Europe. Are you seeing anything in your backlog showing some improvement on the continent at this point to maybe give a little bit additional color on that front?

[Scott Bok:]

Look, it's hard obviously as activities starts to pickup. Europe has been fairly quite for some years now. Look, there is a lot of dialog going and there is lots of activity we hope will turn into transaction announcements. But you have got to wait and see how it plays out. We are hopeful but we are not predicting, let's put it that way.

[Brennan Hawken:]

That's fair. Okay, last one for me. It seems like there has been a shift of tone around deal size and which ones are important for you. So I just was hoping you could maybe clarify for me, last year it seemed like the indication was that the mid-market size deals were missing and that was a problem for you guys to kind of get on those, but it seems like this quarter, it's a bigger benefit that there is large deals. And so can you help me understand which one is more important for Greenhill and what we should watch for the key indicators for you guys for revenue outlook?

[Scott Bok:]

Sure. It's a good question. look, I think all firms like ours have sort of spin their stories slightly differently about what kinds of deals they tend to work on. Regardless of what we all say, we all work on very small deals. We all work on very big deals. What we have noticed and have shown in data and some of presentations that we have done and posted on our website over time, is if you just look at all the announcement that we and others have made over, say, the last couple years, you do find that we are more heavily weighted toward $1 billion or greater transactions. Or I think the other threshold I had was $2.5 billion or greater transactions. And that's where we want to be. It doesn't mean we don't small deals for important clients who we want to do even more things for. We would small deals that can help build us credentials in a particular sector or region around the world. We love doing those deals. But we do want to be weighted toward the bigger deals, call it $1 billion or greater. I do think those deals, they are obviously more profitable, because it takes roughly the same kind of team to do a $1 billion deals that $250 million deal and they obviously add more to the brand because they get more attention. They are better-known companies, et cetera. So we do a bit of everything, but I am very pleased that among the sort of boutique firms out there, it's only the public ones we have a little bit bigger weighting toward $1 billion or greater transactions.

[Brennan Hawken:]

Okay. Thanks for the color.

[Scott Bok:]

Sure.

[Operator:]

And our next question comes from Vincent Hung of Autonomous.

[Vincent Hung:]

Hi. How is it going?

[Scott Bok:]

Very well. Thanks.

[Vincent Hung:]

Two quick question. First one is, for the purposes of the tax rate, what's the split of U.S. versus non-U.S. revenues this quarter or earning?

[Scott Bok:]

Well, we only give that once a year. It's at the end of the year. I think the tax rate doesn't vary all that much, but we don't want to break it down by region every single quarter. It's just not that meaningful. The business is to lumpy for that to be meaningful.

[Vincent Hung:]

Okay. And just on Cogent, is there any sort of seasonality in that business like some M&A?

[Scott Bok:]

I am not even sure there is seasonality in M&A, to be honest. But no, I don't think there is. I mean their deals tend often to often, for obviously accounting reasons, close on the last quarter or last day of a quarter when the private equity fund contains the ledger that it went from owner X to owner Y. But I think it generally happens all year round.

[Vincent Hung:]

Okay. And how many transactions did Cogent work on in the first quarter?

[Scott Bok:]

We don't want to quantify that either. But look, it's a lot. I mean as I said, they do lots of small things as well as some larger things. I would say, it is a more granular kind of business than M&A where often for any firm a few of the big transactions can really drive the outcome.

[Vincent Hung:]

Okay. And just last one for me. Can you talk about how you go to the earnout of $80 million of revenues as opposed to using maybe a higher revenue figure or even an earnings target?

[Scott Bok:]

Yes. That's actually a good question. We have done a lot of earnouts. Obviously we did a lot in Australia. We have advised companies many times over the years on earnouts. And my theory on earnout is, you want to set it high enough that the people you are bringing in try very hard to achieve it, but you don't want have it so high that if there is, say, a downturn in overall activity they get demoralized because suddenly they realize at year-end that they are never going to get the earnout. To me, that's just a disaster for the acquiring company. So we set up a solid respectable level of basically a $40 million a year run rate of revenue. It's a bit below where they were last year. It doesn't mean we expect that to be the outcome by any stretch and they have got, as I said, every incentive to owning Greenhill stock and restricted stock and getting annual compensation to drive it as highly as possible. But our goal is to make it meaningful that we get our money's worth. If they miss by a lot, we want to pay effectively a lower purchase price. But on the other hand, we want it to be not so high that it becomes kind of demotivating for the team and they realize that maybe they might not reach it.

[Vincent Hung:]

Okay. Thanks a lot.

[Scott Bok:]

Thank you.

[Operator:]

The next question is from Michael Wong of MorningStar Equity Research.

[Michael Wong:]

Good morning or good afternoon.

[Scott Bok:]

Good afternoon.

[Michael Wong:]

You specifically said new growth initiatives in the earnings release, but is this just a description of what occurred in the quarter? Or is it a strategic change that could persist going forward?

[Scott Bok:]

Look, as I often say, we are always looking to grow the firm constantly in three different ways. We want to be more broad in terms of geographic scope. We want to have more industry sector expertise. And we want to have more types of advice. And it just so happened that this quarter was one where a lot of those things came together. Obviously Cogent means a whole new different type of advice. The people we hired in Japan and Australia, some very senior people, add a lot to our geographic capabilities. And then we hired industry sector specialists in Houston and Silicon Valley. So obviously we increased the industry sector. So we are going to keep looking for similar more opportunities and hopefully we will have some more even over the course of this year.

[Michael Wong:]

Okay. You also mentioned in the release that comp was partially up from less like RSU forfeitures. So I was wondering, is there a specific timeframe over which you will have greater certainty about any potential managing director departures?

[Scott Bok:]

No. All we were referring to there was really just in comparison to last year. Last year we had a few people early in the year, I can't remember all the details, but we had some RSU forfeitures last year that had an impact on the timing of compensation accruals. There is nothing unusual this year. So I am not expecting anything in that regard. So the whole remark there really refers to things that happened a year ago, not the things happening right now.

[Michael Wong:]

Okay. Thank you.

[Scott Bok:]

Thanks.

[Operator:]

And next we have Ashley Serrao of Credit Suisse.

[Ashley Serrao:]

Good afternoon, guys.

[Scott Bok:]

Hi, Ashley. How are you?

[Ashley Serrao:]

I am okay. I just want to follow-up from Vincent's question. I know you spoke to the revenue target and hear you loud and clear on the $40 million annual run rate. Will you just talk about the earnout structure where you give the Cogent employees effectively a second bite of the apple in case they missed the first two-year earnout? Why did you structure it like that?

[Scott Bok:]

Again, it really is exactly along the theme that I just spoke to a minute ago about my theory of how you best structure earnouts. Think about this earnout versus for example Australia which worked out fine I think and played out as we have intended the earnout to work. That was a longer one. That was a three-year plus a two-year earnout. Two totally separate earnouts, so they can get them both. This time around, we went for effectively one pool of money, one earnout, but they get essentially two bites of the apple. And that really was just learning from seeing other earnouts over time and realizing that if you have, say, a two-year earnout or even worse a shorter-term one and you get a year into and the team says, well the whole market turned down. It has nothing to do with us, but the market turned down. Activity turned down. That gave us a tough year. There is no way we are going to make that up in the second year. You could have people only a year into a deal say, I don't want to say, it didn't work out. I thought we were going to get the earnout, but somehow it didn't work out. By doing this, you keep people fully motivated for the first two years and even if they get partway through, which again you have heard the numbers, I don't think that's going to be the case, but even if they got partway through and thought we are not going to make that earnout, they have every incentive to stay for years three and four to try to do it again. So I think it's hugely in our favor in terms of retention and just stability and people just focusing on the longer-term rather than delivering a lot of revenue in the real short-term and then not worrying about the long-term.

[Ashley Serrao:]

Okay. That makes sense. And then just wanted to -- just a clarification on the compensation ratio commentary for Cogent. Just want to make sure you are referring to 54% as a good starting point?

[Scott Bok:]

Yes. Well, the way I would view it is just kind of folding them into us. In other words, I wouldn't change any sort of compensation ratio assumption as a result of that transaction. Whatever you are assuming is going to be our compensation ratio without Cogent, I would assume the exact same thing with Cogent being part of us. We have contractual arrangement with some of those individuals about various things that we wouldn't want to go into that kind of detail but I think a good modeling assumption is really no change to the comp ratio as a result of them joining.

[Ashley Serrao:]

Okay. And then you have invested a lot this quarter. How are you thinking about hiring through the balance of the year? What remains to be done, in your mind, balance of the year or looking out even further?

[Scott Bok:]

Look, it's a never-ending list. It's not like you ever -- you are not at Colgate and said, I think we are selling enough toothpaste now. You are always looking for more ways to grow the business. And so we are looking for more ways. And these things, as I have always said, they come in streaks effectively. I know in fact on this call, I got some questions a quarter ago of people wondering about recruiting or we are going add people. And I thought we were on the brink of a whole bunch of them, but wasn't in a position to disclose that yet. I think this obviously has already been a big year, but it doesn't mean we have stopped looking. We have got some people we are talking to in quite advanced stages and in a number of different locations and sort of industry sectors and so on. So our outlook and our goal in terms of recruiting is completely unchanged by the fact that we already did 12. If we find five more wonderful people, we would love to welcome them all in the firm. If we don't find any more but we find more in 2016 and beyond, well, we will be happy to take them. We are always fishing for the good fish.

[Ashley Serrao:]

Thank you for taking my questions.

[Scott Bok:]

Sure. Thank you.

[Scott Bok:]

I think that's our last question. So thanks all for joining and thanks for your patience with some of the details on Cogent. Bye now.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.