Perella Weinberg Partners (PWP) FY 2023 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes included elsewhere in this Annual Report on Form 10-K.

Executive Overview

We are a leading global independent advisory firm that provides strategic and financial advice to clients across the most active industry sectors and international markets. Our wide range of global clients include large public multinational corporations, mid-sized public and private companies, individual entrepreneurs, private and institutional investors, creditor committees and government institutions.

For further information regarding our business, refer to “Part I. Item 1. Business” and “Part I. Item 1A. Risk Factors” of this filing.

Business Environment

Economic and global financial market conditions impact our financial performance. The market environment for advisory services has begun to inflect, which has recently driven dialogue and activity levels across the traditional M&A markets.

Our core advisory services benefit from macroeconomic changes that impact our client base and lead them to consider business combinations, acquisitions and divestitures, capital raises and restructurings. We continue to invest in our platform to achieve scale, accelerate growth, and deliver value in anticipation of a rebound in activity levels.

See “Part I — Item 1A. Risk Factors” included elsewhere in this Form 10-K for a discussion of some of the factors that can affect our performance.

Key Financial Measures

Revenues

We operate in a highly competitive environment, and each revenue-generating engagement is separately solicited and negotiated. Our fee-paying client engagements are not predictable, and we may experience fluctuations in revenues from quarter to quarter. To develop new business, we maintain an active business dialogue with existing and potential clients, and we expect to add new clients each year through expanding our relationships, hiring senior advisory professionals, and receiving introductions from our relationship network. However, we also lose clients each year due to various factors, such as sales or mergers, changes in clients’ senior management, and competition from other financial services firms.

Our revenue recognition is often tied to the completion of a transaction, which can be delayed or terminated due to various reasons, including failure to obtain regulatory or board approval, failure to secure financing, or adverse market conditions. Larger transactions may take longer to close, adding unpredictability to the timing of revenues. Despite our efforts, we may receive lower advisory fees or no fee at all if a transaction is not completed. Other barriers to the completion of restructuring transactions include a lack of anticipated bidders, failure to obtain court approval, or a failure to reach an agreement with creditors. In such cases, our advisory fees may be limited to monthly retainer fees plus the reimbursement of expenses.

We do not present our revenue by the type of advice we provide because of the complexity of the transactions on which we may earn revenue and our holistic approach to client service. For instance, a traditional M&A engagement may require additional advisory services, such as capital markets or capital solutions advice or a private capital raise, which may call for cross-functional expertise from our professionals. We focus on dedicating the necessary resources and expertise to each engagement, regardless of product lines, to achieve the desired outcome for our clients. Consequently, tracking the type of advisory service offered in each instance is not practical.

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Operating Expenses

Our operating expenses are classified as (i) total compensation and benefits expenses including equity-based compensation and (ii) non-compensation expenses.

Compensation and Benefits Expenses

Our compensation and benefits expenses consist of base salary, benefits, severance, payroll taxes, annual incentive compensation payable as cash bonus awards, deferred compensation awards, and the amortization of equity-based compensation awards that are subject to a service vesting condition, and in some cases, a market-based performance vesting condition. These expenses also include signing bonuses and compensation paid pursuant to guarantees for new hires.

Compensation is determined by management based on revenues earned, headcount, labor market conditions, and anticipated compensation requirements for our employees. Such factors can fluctuate, including headcount and revenues earned, and as a result, our compensation expenses may fluctuate materially in any particular period.

The amortization expense for certain equity-based awards granted by Professional Partners is allocated fully to non-controlling interests as these awards have no economic impact on, and do not dilute, PWP shareholders relative to Professional Partners. Refer to Note 12—Equity-Based Compensation in the notes to the consolidated financial statements for additional information.

Non-Compensation Expenses

Our non-compensation expenses include the costs of professional fees, technology and infrastructure, rent and occupancy, travel and related expenses, depreciation and amortization and general, administrative and other expenses. Our non-compensation expenses also include certain expenses reimbursed by our clients. Overall, our non-compensation expenses are subject to variability due to multiple factors, including headcount, business needs, and inflation.

Non-Operating Income (Expenses)

Non-operating income (expenses) includes the impact of income and expense items that we consider to be non-operational in nature, which typically includes related party income, interest income and expense, and other non-operating gains (losses), including the impact of foreign exchange rate fluctuations. Non-operating income (expenses) also included the change in fair value of warrant liabilities prior to the completion of the exchange offer and solicitation relating to the Company’s then-outstanding warrants on August 23, 2022.

Non-Controlling Interests

Non-controlling interests represent the ownership interests in PWP OpCo held by holders other than Perella Weinberg Partners, which are Professional Partners and the ILPs. Such holders hold PWP OpCo Units that are exchangeable into PWP Class A common stock on a one-for-one basis. Profits and losses of PWP OpCo are allocated to the non-controlling interests in proportion to their ownership interest regardless of their basis, with the exception of the amortization expense for certain equity-based awards granted by Professional Partners, which is allocated fully to non-controlling interests as these awards have no economic impact on, and do not dilute, PWP shareholders relative to Professional Partners.

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Results of Operations

The following is a discussion of our results of operations for the years ended December 31, 2023 and 2022. For a discussion of the year ended December 31, 2022 versus 2021, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations” in our Form 10-K for the year ended December 31, 2022.

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Revenues

The following table provides revenue statistics for the years ended December 31, 2023, 2022 and 2021:

Revenues were $648.7 million for the year ended December 31, 2023 as compared with $631.5 million for the year ended December 31, 2022, representing an increase of 3%. Revenues attributed to mergers and acquisition activity were up year-over-year, while financing and capital solutions revenues were lower due to a few large financing fees in the prior year period, which offset positive performance in the restructuring business.

Compensation and Benefits Expenses

For the year ended December 31, 2023, total compensation and benefits expenses were $608.9 million, an increase of 12% compared with $545.5 million for the year ended December 31, 2022. The increase in total compensation and benefits expenses was a result of a higher compensation margin on a higher revenue base, additional equity-based compensation expense from awards granted during the first quarter of 2023, and $37.3 million of business realignment costs associated with headcount reductions in the current year (the “Business Realignment”). The Business Realignment was undertaken to improve compensation alignment and to provide for greater flexibility to advance strategic opportunities, and related costs include separation and transition benefits and the acceleration of equity-based compensation amortization (net of forfeitures) for terminated employees.

Non-Compensation Expenses

For the year ended December 31, 2023, total non-compensation expenses were $154.8 million, an increase of 16% compared with $133.7 million for the year ended December 31, 2022. The increase in non-compensation expenses was primarily the result of higher travel and related expenses due to increases in both volume of travel and headcount, increased legal spend, elevated technology and infrastructure expenses related to certain investments, and higher rent and depreciation expenses due to overlapping rent and new assets being placed in service related to the renovation of the New York office space and relocation of the London office space. These increases were partially offset by lower recruiting and consulting fees and reduced D&O insurance costs.

Non-Operating Income (Expenses)

For the year ended December 31, 2023, non-operating income was $2.3 million compared with non-operating income of $26.3 million for the year ended December 31, 2022. In the current year, non-operating income included interest income, which substantially increased from the prior year due to higher interest rates and additional investments in U.S. Treasury securities. Interest income was partially offset by a net loss from foreign exchange rate fluctuations, a non-operating loss on investment, and a charge related to a settlement reached with the staff of the SEC in connection with self-reporting relating to recordkeeping of business communications on “off-channel” messaging applications (the “Settlement”). Pursuant to the Settlement, Perella Weinberg Partners LP, Tudor, Pickering, Holt & Co. Securities LLC, and Perella Weinberg Partners Capital Management LP, collectively, agreed to pay $2.5 million in the aggregate to the SEC on a joint and several liability basis. The Company recognized a charge of $1.25 million related to the Settlement, with the remainder recognized by Perella Weinberg Partners Capital Management LP (refer to Note 16—Related Party Transactions in the notes to the consolidated financial statements for information on the Company’s relationship to Perella Weinberg Partners Capital Management LP). In the prior year period, non-operating income primarily included a gain from the change in fair value of warrant liabilities and a net gain from foreign exchange rate fluctuations. For both periods, foreign exchange rate fluctuations largely related to U.S. dollar-denominated cash and intercompany receivables held by our foreign subsidiaries.

Income Tax Expense (Benefit)

The Company’s income tax benefit and effective tax rate were $1.0 million and 0.9%, respectively, for the year ended December 31, 2023 compared to income tax expense and an effective tax rate of $10.3 million and (48.2)%, respectively, for the year ended December 31, 2022. The change in the effective tax rate was primarily due to the relative size of our permanent differences in relation to the pre-tax loss in the respective periods, as well as the recognition of a previously unrecognized tax benefit at one of the Company’s foreign subsidiaries during the year ended December 31, 2023.

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Liquidity and Capital Resources

General

We regularly monitor our liquidity position, including cash and cash equivalents, working capital assets and liabilities, commitments and other liquidity requirements. Our primary sources of liquidity are our cash balances, investments in short-term marketable debt securities, the net cash generated from operations, and the available borrowing capacity under our Revolving Credit Facility. Our primary cash needs are for working capital, operating expenses (including cash compensation for our employees), repurchasing shares of the Company’s Class A common stock, withholding tax payments for vested PWP Incentive Plan Awards, income taxes, dividends and distributions, capital expenditures, making payments pursuant to the tax receivable agreement, commitments, and strategic investments. We generally pay a significant portion of our annual cash incentive compensation during the first quarter of each calendar year with respect to the prior year’s results. Therefore, levels of cash and/or investments in short-term marketable debt securities generally decline during the first quarter and build over the remainder of the year.

Our current assets are primarily composed of cash, investments in short-term marketable debt securities, receivables related to fees earned from providing advisory services, certain prepaid expenses and certain amounts due from related parties. Our current liabilities are primarily composed of accrued employee compensation, accounts payable and other accrued expenses. Cash includes cash held at banks, including interest-bearing money market accounts. As of December 31, 2023 and 2022, the Company had cash balances of $247.2 million and $171.6 million, respectively, and investments in short-term marketable debt securities, consisting entirely of U.S. Treasury securities, of $91.2 million and $140.1 million, respectively.

Our liquidity is highly dependent upon cash receipts from clients, which generally require the successful completion of transactions. Accounts receivable typically have net terms of 30 days. Accounts receivable were $47.8 million, net of a $2.2 million allowance for credit losses balance as of December 31, 2023. Accounts receivable were $67.9 million, net of a $1.1 million allowance for credit losses balance as of December 31, 2022.

The Company has a Revolving Credit Facility with Cadence Bank with an available line of credit of $50.0 million. Additionally, up to $20.0 million of incremental revolving commitments above the $50.0 million commitment amount may be incurred under the Credit Agreement. As of December 31, 2023 and 2022, the Company had no outstanding balance related to the Revolving Credit Facility and no incremental revolving commitments were incurred. For further information on the Revolving Credit Facility, refer to Note 10—Debt in the notes to consolidated financial statements included elsewhere in this Form 10-K.

Based on current market conditions, we believe that our cash on hand, investments in short-term marketable debt securities, net cash generated from operations and the available borrowing capacity under our Revolving Credit Facility will be sufficient to meet our operating needs and commitments for the next twelve months; however, if these sources of liquidity are not sufficient, we may seek additional debt or equity financing.

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Cash Flows

A summary of our operating, investing and financing cash flows is as follows:

Year Ended December 31, 2023

Operating activities resulted in a net cash inflow of $145.9 million primarily attributable to cash collected from clients, net of cash operating expense outflows, including discretionary bonuses paid during the first quarter of 2023 with respect to prior year compensation expense.

Investing activities resulted in a net cash outflow of $5.8 million largely attributable to the purchase of leasehold improvement fixed assets associated with the renovation of the New York office space and relocation of the London office space, partially offset by a net cash inflow from investments in U.S. Treasury securities.

Financing activities resulted in a net cash outflow of $67.0 million primarily due to the repurchase of shares pursuant to the stock repurchase program, distributions to partners, withholding tax payments for vested PWP Incentive Plan Awards, and dividend payments.

Year Ended December 31, 2022

Operating activities resulted in a net cash outflow of $17.8 million primarily attributable to cash collected from clients, net of cash operating expense outflows, including discretionary bonuses paid during the first quarter of 2022 with respect to prior year compensation expense.

Investing activities resulted in a net cash outflow of $166.2 million largely attributable to the investment of excess cash in U.S. Treasury securities as well as the purchase of leasehold improvement fixed assets associated with the renovation of the New York office space and relocation of the London office space.

Financing activities resulted in a net cash outflow of $136.8 million primarily related to the repurchase of shares pursuant to the stock repurchase program, distributions to partners, withholding tax payments for vested of PWP Incentive Plan Awards, and dividend payments.

For a discussion of the year ended December 31, 2021, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Cash Flows” in our Form 10-K for the year ended December 31, 2022.

Share Repurchase Program

The Company’s board of directors approved a stock repurchase program under which the Company is authorized to repurchase up to $200.0 million of the Company’s Class A common stock with no requirement to purchase any minimum number of shares. During the year ended December 31, 2023, the Company purchased 2,376,683 shares, at a cost of $22.5 million in the aggregate. As of December 31, 2023, $108.8 million remains of the combined $200.0 million share repurchase authorization.

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Exchange Rights

In accordance with the PWP OpCo LPA, holders of PWP OpCo Units (other than the Company) may exchange these units for (i) shares of Class A common stock on a one-for-one basis or (ii) cash from an offering of shares of Class A common stock with the form of consideration determined by the Company. See Note 11—Stockholders’ Equity in the notes to consolidated financial statements included elsewhere in this Form 10-K for further information.

Regulatory Capital

We actively monitor our regulatory capital base. Our principal subsidiaries are subject to regulatory requirements in their respective jurisdictions to ensure general financial soundness and liquidity. This requires, among other things, that we comply with certain minimum capital requirements, record-keeping, reporting procedures, experience and training requirements for employees and certain other requirements and procedures. These regulatory requirements may restrict the flow of funds to and from affiliates. Refer to Note 7—Regulatory Requirements in the notes to consolidated financial statements included elsewhere in this Form 10-K for further information. These regulations differ in the United States, United Kingdom, Canada, France and other countries in which we operate a registered broker-dealer or regionally similar construct. The license or regulatory framework under which we operate in each such country is meant to comply with applicable laws and regulations to conduct an advisory business. We believe that we provide each of our subsidiaries with sufficient capital and liquidity, consistent with their business and regulatory requirements to effectively operate in each jurisdiction.

Other Commitments and Contractual Obligations

Sponsor Share Surrender and Share Restriction Agreement

Concurrent with the Business Combination Agreement, the Company and certain other parties entered into the Sponsor Share Surrender and Share Restriction Agreement with the Sponsor, which was amended on May 4, 2021. See Note 11—Stockholders’ Equity in the notes to consolidated financial statements included elsewhere in this Form 10-K for further information.

Tax Receivable Agreement

As of December 31, 2023, we had an amount due of $30.9 million pursuant to the tax receivable agreement, which represents management’s best estimate of the amounts currently expected to be owed in connection with the tax receivable agreement for the Business Combination and subsequent exchanges made to date. See Note 16—Related Party Transactions in the notes to consolidated financial statements included elsewhere in this Form 10-K for further information as well as the expected timing of payments.

Leases and Capital Expenditures

We have various non-cancelable operating leases in connection with the leases of our office spaces and equipment. As of December 31, 2023, we had $175.9 million of operating lease liabilities. See Note 5—Leases in the notes to consolidated financial statements included elsewhere in this Form 10-K for further information as well as the expected timing of payments. During the current year, the Company completed construction of new office space in New York and London. As of December 31, 2023, the Company had $6 million of remaining cash payments, net of tenant improvement allowances, related to these projects.

Business Realignment

We currently estimate that approximately $15 million of cash payments remain outstanding related to the Business Realignment, substantially all of which are expected to be paid during the first half of 2024.

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Market Risk and Credit Risk

Our business is not capital-intensive and we do not invest in derivative instruments. We are not subject to significant market risk (including interest rate risk and commodity price risk) or significant credit risk.

Risks Related to Cash and Cash Equivalents

Our cash and cash equivalents include any short-term highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less from the date of purchase. Cash is maintained in U.S. and non-U.S. bank accounts. Most account balances exceed U.S. Federal Deposit Insurance Corporation (FDIC) coverage limits or the coverage limits of the relevant foreign deposit insurance system, as applicable. We believe our cash and cash equivalents are not subject to any material interest rate risk, equity price risk, credit risk or other market risk.

Credit Risk

We regularly review our accounts receivable and allowance for credit losses by considering factors such as historical experience, credit quality, age of the accounts receivable, and the current economic conditions that may affect a client’s ability to pay such amounts owed to the Company. We maintain an allowance for credit losses that, in our opinion, provides for an adequate reserve to cover current expected credit losses. Refer to Note 2—Summary of Significant Accounting Policies in the notes to consolidated financial statements included elsewhere in this Form 10-K for further information.

With respect to investments, we manage our credit risk exposure by holding investments primarily with investment grade credit quality. As of December 31, 2023, the Company held investments of $91.2 million in U.S. Treasury securities with maturities of less than 12 months.

Exchange Rate Risk

The Company is exposed to exchange rate risk as a result of having foreign subsidiaries with non-U.S. dollar functional currencies as well as from entering into transactions and holding monetary assets and liabilities that are not denominated in the functional currency of its operating subsidiaries. Specifically, the reported amounts in our consolidated financial statements may be affected by movements in the rate of exchange between the pound sterling, Euro, and Canadian dollar and our reporting currency, the U.S. dollar. For the years ended December 31, 2023 and 2022, the net impact of non-functional currency-related transaction gains and losses recorded in Other income (expense) on our Consolidated Statements of Operations was a $3.3 million loss and a $6.8 million gain, respectively, primarily related to U.S. dollar-denominated cash and intercompany receivables held by our foreign subsidiaries as the U.S. dollar weakened and strengthened, respectively. For the years ended December 31, 2023 and 2022, the net impact of the fluctuation of foreign currencies recorded in Foreign currency translation gain (loss) within our Consolidated Statements of Comprehensive Income (Loss) was a $4.1 million gain and a $9.7 million loss respectively. We have not entered into any transactions to hedge our exposure to these foreign currency fluctuations using derivative instruments or other methods but may do so if we deem appropriate in the future. As of December 31, 2023, we held cash balances of $42.0 million of non-U.S. dollar currencies, composed of pound sterling, the Euro, and Canadian dollars.

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Critical Accounting Estimates

The preparation of our consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions, and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. The following are our critical accounting estimates and judgments used in the preparation of our consolidated financial statements. We believe that these critical accounting estimates represent those that are most important to the presentation of our financial condition and results of operations and require management's most difficult, subjective and complex judgment. Due to their subjectivity, actual results could differ materially from the amounts reported. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period for which they are determined to be necessary.

Revenue Recognition

The services provided under contracts with clients include transaction-related advisory services, fairness opinion services, research, and underwriting services. The fee structures for the Company’s transaction-related advisory services often involve an “all or nothing” consideration amount and the associated fees are predominantly considered variable as they are often based on the ultimate transaction value or the outcome ultimately achieved and/or are susceptible to factors outside of the Company’s influence, such as third-party negotiations, regulatory approval, court approval, and shareholder votes. Accordingly, a large portion of the fees associated with these services is constrained until substantially all services have been provided, specified conditions have been met and/or certain milestones have been achieved, and it is probable that a significant revenue reversal will not occur in a future period. Such determination of probability may require significant judgement, especially when assessed near the end of a reporting period.

The Company records deferred revenue when it receives fees from clients that have not yet been earned or when the Company has an unconditional right to consideration before all performance obligations are complete (e.g., when announcement fees are received but additional services are expected to be provided between transaction announcement and transaction close). In these cases, the deferred amount is often based on an estimate of the services remaining to be completed, if any. The determination of when and to what extent to subsequently recognize deferred variable fees may require significant judgment, particularly when milestones are met near the end of a reporting period and in cases where additional services are expected to be provided subsequent to the achievement of the milestone.

Certain fixed fees specified in the Company’s contracts, which may include upfront fees and retainers, are recognized on a systematic basis over the estimated period in which the related services are performed. Estimating contract terms may require significant judgment and often change over the course of an engagement.

Income Taxes

Our income tax expense, deferred tax assets and deferred tax liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. We are subject to income taxes in the United States and certain foreign jurisdictions. We make estimates and judgments in determining the provision for income taxes and certain tax assets and liabilities that arise from differences in the timing of recognition of revenue and expense for tax and financial reporting purposes. Significant changes in these estimates may result in an increase or decrease to our tax provision in a subsequent period.

We regularly assess the likelihood that we will be able to recover our deferred tax assets. We believe that we will ultimately recover the deferred tax assets recorded on our Consolidated Statements of Financial Condition. However, should there be a change in the likelihood of our ability to recover our deferred tax assets, our tax provision would increase with the recording of a valuation allowance in the period in which we determined that the recovery is not likely. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including projected future taxable income. In projecting future taxable income, we begin with historical results and incorporate certain assumptions, including revenue growth and operating margin. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying business.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations. We record unrecognized tax benefits based on whether it is more-likely-than-not that uncertain tax positions will be sustained on the basis of the technical merits of the position. If it is determined an uncertain tax position is more-likely-than-not to be sustained, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. It is inherently difficult and subjective to estimate such amounts, as we must determine the probability of various possible outcomes.

Refer to Note 9—Income Taxes in the notes to the consolidated financial statements.

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Equity Compensation

A portion of the PWP Incentive Plan Awards granted to certain employees and non-employees vest upon the occurrence of both service and market conditions being achieved. Compensation expense is recognized for these equity-based awards over the requisite vesting period in an amount equal to the fair value of the awards at the grant date, provided the requisite service period is completed, irrespective of whether the market condition is satisfied. The effect of the market condition is reflected in the grant date fair value of the award. The Company utilized a Monte Carlo simulation valuation model to determine the grant date fair value which required significant judgment for various inputs including the risk-free interest rate, dividend yield and the volatility factor.

Refer to Note 12—Equity-Based Compensation in the notes to the consolidated financial statements.