Moelis & Co. Doesn't Need Your Moneyby
At 110 pages of text plus 26 of financials, the prospectus for Moelis & Co.'s initial public offering is a pretty quick read, for an IPO prospectus. Which makes sense, because Moelis & Co. has a pretty simple business model:
- It advises companies on mergers and restructurings and such, with a list of big deals in 2013 including the sale of H.J. Heinz, the sale of NYSE Euronext, and the American Airlines bankruptcy;
- those companies pay Moelis;
- Moelis pays its bankers.
It pays them a lot, but every bank pays its bankers a lot, don't get too excited about that. Moelis has 317 bankers, and paid $265 million in compensation and benefits last year, for an average of about $835,000 per banker.
Whatever. Moelis's business model, and prospectus, are simple enough that you can find more interesting averages. I was particularly tickled by the fact that Moelis spent $18.2 million -- an average of just over $57,000 per banker -- on travel expenses. That is a lot of trips to Pittsburgh, and also an excellent reminder of why I left banking. Never again will anyone spend $57,000 a year flying me to business meetings.
The simplicity of the business model carries through to the balance sheet. Moelis's assets consist almost entirely of cash and Treasuries, plus some small receivables and prepaid expenses, and its liabilities consist mostly of money it's promised to pay its bankers but hasn't gotten around to paying them yet. There's a lot more of the former than the latter -- $303 million in cash versus $134 million in all liabilities -- so Moelis isn't exactly desperate for cash.
So why raise money -- the prospectus has a $100 million amount on the cover -- in an IPO? Unlike the last they-don't-need-the-money IPO that I wrote about, King Digital Entertainment, Moelis does have a use in mind for its cash: After paying its bankers' fees, 2 Moelis is going to use the rest of the proceeds to ... hmm, pay its bankers. 3 I guess you stick with what you know.
Obviously, all financial industry IPOs are in large part about cashing out the employees at what they hope is a good time to sell -- "Moelis is seeking to raise funds after mergers and acquisitions activity had its strongest start to the year since before the global financial crisis" -- but often there are other, expansionist goals as well. The IPO gives you a platform to raise public money and invest in capital-heavy businesses like trading or merchant banking or lending money to clients to win business. 4 You can add scale and diversify away from the vagaries of the corporate advisory business.
But that doesn't seem to be a big part of Moelis's plan. And you can see why not: There's a real appeal to keeping your advisory business free of anything capital-intensive, since trading and lending businesses tend to carry more financial and regulatory risk and raise conflicts of interest with advisory clients. So the prospectus talks up Moelis's independence as an advisor. And here is the entirety of its "Why We Are Going Public" section:
We believe that becoming a public company is important to the evolution of our business and will allow us to:
- expand our business, including through the improved ability to attract, hire and retain talented advisory professionals by utilizing a publicly traded security;
- enhance our ownership culture through continued equity-based compensation;
- establish a process for existing owners to realize the value of their equity over time while maintaining our independence; and
- strengthen our brand and position as a leading global independent advisor.
Basically, name recognition, plus making it easier to pay our bankers. I'm not sure that really requires raising $100 million in public money, but then, Moelis is probably better at giving companies financial advice than I am, so I can't really criticize. And if you are going to raise public money, and if the traditional choice for what to do with that money is to get into new and riskier businesses, I guess there's no harm in just giving it to your employees instead.
The prospectus uses the word "banker," not "employee," so you should probably adjust that down for non-banker employees? I think? I did not find a number of non-banker employees in my perusal. In any case, the perennial comp is Goldman, which last year paid $12.6 billion to its 32,900 employees, for an average of $383,374 each. But that is over a wider range of employees, and you can judge for yourself which number is "more" in whatever sense is relevant to you. Evercore, maybe a closer comp, has about 1,000 employees making an average of about $485,000 each.
Moelis is one of three bookrunners listed on the deal, so I guess it'll get paid some fees? (The lead banks are Goldman and Morgan Stanley.) I was going to snark about Moelis not being an IPO powerhouse, which is true, but actually Bloomberg's LEAG function (global equity and equity-linked) turns up 25 equity deals on which they've been bookrunners since the start of 2007, for a total of $578 million, ranking them 264th among all underwriters in that time.
In the form of, Moelis buys partnership interests from its holding company, and the holding company distributes the money to its partners. The corporate structure isn't really that exciting but if that's your thing, page 8 has a lovely boxes-and-lines chart.
I recently read "What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences," which I had my doubts about from its title but which I ended up enjoying and would recommend. To oversimplify the story, Goldman was a wee partnership where everyone looked out for everyone else and risk was tightly managed because all the partners' capital was at stake, so the traders didn't take crazy risks. But eventually they needed more capital for the trading business, so they had to go public and raise permanent capital. And that changed the culture: Since people weren't actually partners any more, the partnership culture deteriorated.
I'm not sure I agree 100 percent with everything in it but the bones of the story seem basically right, and it's an interesting model to think about in relation to any partnership-type firm -- investment bank, private equity firm, etc. -- thinking about going public. You're driven to go public by your capital-intensive businesses, but then those businesses run out outside capital and change the culture. I guess if you're driven to go public purely by the desire to cash out you get ... I don't know, different dynamics that might lead you to a similar place?
(Matt Levine writes about Wall Street and the financial world for Bloomberg View.)
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