Evercore: Full-Fledged Sponsor Return Should Still Depend On Interest Rate Cuts

Company Performance - Evercore has seen significant growth in M&A activity, driven by new managing directors and a steady stream of restructuring and liability management revenue [3] - Revenues for advisory in Q2 were up 52%, reflecting strength in M&A and other non-M&A businesses [5] - Underwriting revenues, connected with ECM and DCM activity, were better in the 6-month figures than in Q2 due to the short visibility of ECM business and dependence on immediate public market conditions [5] - Compensation expense ratios are around the same as last year despite headcount increases, indicating potential for improved net incomes if sponsor markets continue to accelerate [5] Industry Trends - Sponsor markets have seen a 15-20% increase in activity YTD, driven by investors in PE funds pushing for investment exits, redemptions, and new deployments [4] - The emergence of private credit and growth in global shadow banking have contributed to the availability of funding options, making credit spreads cheaper despite high risk-free benchmarks [4] - The rate environment or promise of lower rates on the yield curve has less to do with funds returning to the table, as PEs would ideally wait for a couple of rate cuts to happen [4] - The average holding periods of PE portfolios are approaching lengths more commonly seen in VC, around 7 years, indicating a need for portfolio rotation [4] Valuation and Investment Case - Evercore is cheaper than Moelis on a forward P/E basis despite similar leverage to sponsors and cheaper than Perella Weinberg when accounting for dilutive effects [3] - The return of sponsor markets is crucial for the investment case, with restructuring being solid and bankruptcy numbers expected to rise unless the economy improves significantly [6] - Evercore's valuation at a 23x forward PE is not a total steal but a good prospect, with a 5% forward earnings yield that should grow if sponsor markets deliver [6] - Further improvement in conditions is already priced in to some extent, meaning incomes need to accelerate for the company to hit its target [6]